Reporting a second 1099-b of ISO sale in 2021

[asdfqwer]

I held ISO shares of a company that was acquired in 2021, and all my shares were purchased during the merger. In 2022, I received an 1099-B for this sale and filed it. The cost basis was left blank (unknown to the broker), so I computed it following the instructions on TurboTax. Later in the year, I received a notice about a cost adjustment of the sale that got me extra earnings. Let's say I bought the shares at $5/share and they were purchased at $10/share. After cost adjustment I got an extra $1/share. Now, in 2023, I received a new 1099-B with the extra $1/share. The cost basis was again left blank. How should I file this 1099-B? It doesn't make sense to report the same cost basis because that would appear I had capital loss ($5/share -> $1/share), which I didn't have. But leaving it blank/0 also doesn't make sense because I'm just getting the earnings in two separate transactions. Any help is appreciated. Thanks!

[GeorgeM777]

Need you to clarify some information.  It appears the 1099-B you received in 2023 relates back to the ISO that you exercised in 2021, is that true?  If so, then you may have to amend your 2021 return.  If not, and it relates to transactions that occurred in 2022, then you will report it on your 2022 tax return.  

Also, in your post you mention an example of purchasing the shares at $5 and then purchasing them again at $10.   Do you mean that your strike price for the option was $5 while the stock price was $10, thus the discount was $5?  If yes, then because these were ISOs, and it appears that the ISOs were sold less than a year after the exercise date, then that discount should have been reported as ordinary income on your W-2.  Any gain above the reported ordinary income would be short-term capital gain.  

You mention that the cost basis was left blank.  That fact is not uncommon as brokers don't always know cost basis and thus, will leave cost basis blank or they might report cost basis as zero.  In either case, the basis needs to be adjusted to reflect the price you paid.  But first, we need to know to whether your 1099-B relates back to tax year 2022.  Or whether it relates to tax year 2023.

@asdfqwer 

[asdfqwer]

Hi @GeorgeM777 ! Thanks for the reply. To clarify, I bought the shares at $5, sold them at $10 in 2021, and received an extra $1/share in 2022. The 1099-B for the extra $1/share is related to the sell in 2021, but the form itself has title "Tax Year 2022 Form 1099-B". I was no longer working at the company when my shares were sold.

Based on your reply, I should be amending my 2021 return, even though I received the money in 2022, correct?

[GeorgeM777 · Accepted solution]

That additional information is helpful.  Ordinarily, if the adjustment relates back to a prior year, then amending the prior year tax return is the preferred way to go.  However, in your case, the IRS may consider the additional $1 per share as earned in 2022 because that amount has been included on your 2022 1099-B.   Does your 1099-B provide any explanation that the additional $1 per share adjustment relates to the sales in 2021?  If it does, then it would seem that you have a justification for reporting the additional $1 per share adjustment on your return for 2021 (and it would then be an amended 2021 return).

However, if there is no such explanation, then perhaps reporting the additional income in 2022, the year it was received, may be the better option.  It appears the $1 per share adjustment represents additional gain, and thus, for 2022 you could report your cost basis as zero.  Your holding period would relate back to your original purchase date, and therefore, it would appear that this gain would qualify as a long term capital gain.  

@asdfqwer 

[asdfqwer]

The 1099-B doesn't mention the sales in 2021, and Box 1c only has a date in 2022. I'll have to report the cost basis as 0. Thank you @GeorgeM777 !

[asdfqwer]

@GeorgeM777 sorry follow up question on this topic: I just found out that extra $1/share actually came from escrow. Does this change the way I'm filing this 1099-B?

[GeorgeM777]

No, it should not.  Absent some other information, the fact that the escrow was released in 2022 implies that there may have been certain conditions imposed on its release.   Using the "receipt of income" as the relevant date as to when income should be reported, then the fact that you received the additional $1 per share in 2022 further supports the idea that reporting it on your tax return for 2022 is the preferred option. 

@asdfqwer