As we head into tax season, there’s one major mistake I see people make with their Restricted Stock Unit (RSU) sales that could significantly inflate their tax bill: reporting $0 cost basis.
This single error, often made by a tax preparer who simply relies on the 1099-B form alone, can result in you paying capital gains tax on the entire sale amount, rather than just the gain. In short, your tax bill could end up being bigger than it needs to be.
How Do RSU Taxes Actually Work?
The money you earned from your RSUs at the time they vested was already reported as ordinary income on your W-2. This means that part of the sale price—the fair market value at vesting—is already your cost basis. You’ve already paid ordinary income tax on it. If your tax preparer reports $0 cost basis, you are effectively paying taxes on something that was already taxed.
The key to fixing this and reducing your tax liability lies in a crucial document: the 1099-B supplemental statement.
This supplemental statement provides the adjusted cost basis for your RSU sales. When you or your preparer apply this adjusted cost basis correctly to your tax return, it reduces your reported capital gain—or even turns it into a capital loss—thereby lowering the amount of tax you owe. It’s a simple correction that may materially reduce taxes owed depending on your filing and situation. Always ensure you provide this extra document to your tax preparer. If you don't have it, you can usually download it from your brokerage account.
Think of the Tax Code as Your Roadmap
Beyond avoiding crucial mistakes like this, remember that the tax code isn't just a hurdle; it’s a detailed roadmap.
Far too many people view taxes as an annual obligation to be minimized at the last minute. I encourage you to shift that perspective. The government uses the tax code to incentivize certain financial behaviors—like saving for retirement, investing in certain accounts, or donating stocks.
By intentionally directing your finances to align with these incentives, you can effectively utilize the tax system to work for you. It’s a playbook for building long-term financial flexibility and aligning your resources with your personal goals.
Don't fight the map. Understand it, marinate in it, and follow it to your advantage. A proactive approach to tax planning, not just tax preparation, is the ultimate difference-maker in your financial life.
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Disclosure: Investment advisory services are offered through Fiduciary Financial Advisors, a registered investment adviser. This newsletter is for informational purposes and is not tax advice. Tax outcomes depend on individual circumstances and may change with future guidance or law.
