When You Sell RSU Shares, the Cost Basis Decides the Tax Bill
She's a senior director of product at a publicly traded tech company. Seven years in, her RSUs have stacked into a position worth a little over $2 million of one stock. She decides to sell a chunk, 500 shares, to start diversifying. The trade executes. She feels good about it.
Then she gets her 1099-B from the brokerage. The cost basis is reported as zero. The entire sale price shows as a gain. And she already paid ordinary income tax on those shares when they vested. Something is wrong, and if her preparer files the return as-is, she pays tax twice on the same money.
This is the most common and most avoidable mistake in RSU tax reporting. Here's how it works, why the broker has it wrong, and what to do about it.
Two Tax Events, One Stock
Every RSU grant produces two separate tax events. Understanding them is the difference between a correct return and a phantom gain.
Event one: vesting. When RSUs vest, the value of the shares is added to your W-2 as ordinary income. Your employer withholds some shares for taxes (sell-to-cover), and the rest land in your brokerage account. The vesting price per share becomes your cost basis, and you have already paid ordinary income tax on it.
Event two: selling. When you sell those shares, the difference between the sale price and your cost basis is a capital gain or loss. If the stock went up between vesting and sale, you owe capital gains tax on the increase. If it went down, you have a capital loss.
The key number is the cost basis. It should equal the fair market value on the vesting date, multiplied by the number of shares that vested. That number is already on your W-2. It needs to be on your 1099-B too.
Why Your 1099-B Probably Reports Zero Cost Basis
Here's where the system breaks. Many brokerages report the cost basis on vested RSU shares as zero or as a placeholder. They know how many shares were deposited, but they do not always know the vesting price. The result is a 1099-B that shows the full sale proceeds as a gain.
The IRS gets a copy of that 1099-B. If you file the return without correcting the cost basis, the IRS computer matches the reported gain against the sale proceeds and expects tax on the full amount. The ordinary income you already paid at vesting is invisible to that matching process. To the IRS's system, it looks like a $0-basis sale.
This is not a tax problem. It is a reporting problem. And it is entirely fixable.
How to Fix It Before You File
Correcting the cost basis requires a manual adjustment on Form 8949 when you file. Here is the general shape of how it works.
You need the vesting date and the fair market value per share on that date. Your brokerage statement or your employer's equity portal will have this. For each lot sold, you report the sale proceeds from the 1099-B and then adjust the cost basis to reflect the actual vesting price.
The adjustment is reported on Form 8949 with code B (for a broker-reported transaction where the basis was not reported to the IRS). You enter the sale price as shown on the 1099-B, then the corrected cost basis, and the difference is your true capital gain or loss.
If you sold shares from multiple vesting dates, each lot needs its own entry. This is where specific identification of shares matters. If your brokerage defaults to FIFO (first in, first out), you may be selling the oldest shares with the lowest cost basis. You can elect specific identification to sell the most recently vested shares first, which typically have a higher cost basis and a smaller taxable gain. For the bigger picture on how this fits into a multi-year diversification strategy, we've written about why your RSUs are the biggest bet you didn't choose.
What Happens If Nobody Catches It
If the return is filed without the adjustment, the cost basis mismatch sits in the IRS's system. Sometime in the following year, a CP2000 notice arrives. The IRS proposes to tax the full sale amount as a gain. The notice includes interest and penalties.
The fix at that point is the same adjustment, but now you are responding to a notice instead of filing a correct return. It takes longer. It requires a written response. And it creates a moment of panic that could have been avoided entirely.
A Mid-Year Check for Your RSU Plan
It is July. You have time before year-end to get this right. Here is what to look at now.
Pull up your brokerage account and check how cost basis is reported for the RSU shares you already hold. If the basis shows as a placeholder or zero, that is a flag. Call your brokerage and ask whether they can accept a cost basis adjustment from the employer's vesting data. Some brokerages can update it. Most cannot, which means you will adjust it at filing time.
If you are planning to sell more shares this year, consider using specific identification of lots. This lets you choose which vesting lots to sell and gives you control over the tax outcome. You can sell shares from the most recent vesting date first, which have the highest cost basis and the smallest capital gain. The mechanics vary by brokerage, but the election is available to any taxpayer.
Also check whether your 10b5-1 plan (if you have one) is set up to use specific identification or defaults to FIFO. The plan's default matters, and it can be changed. We've covered how your 10b5-1 plan decides the tax bill in more detail.
FAQ
What is the cost basis of RSU shares?
The cost basis of RSU shares is the fair market value on the vesting date, as reported on your W-2. This is the amount you already paid ordinary income tax on. When you sell, the cost basis is subtracted from the sale price to determine your capital gain or loss.
Why does my 1099-B show zero cost basis for RSUs?
Many brokerages do not receive the vesting price data from your employer. They report the shares as deposited but show the cost basis as zero or a placeholder. This is a common reporting gap, not an error in your tax liability.
How do I avoid paying tax twice on my RSUs?
You adjust the cost basis on Form 8949 when you file your tax return. Report the actual vesting price as the cost basis instead of the zero or placeholder reported by the brokerage. This ensures the capital gain reflects only the change in value after vesting.
What is the difference between covered and non-covered RSU shares?
Covered shares are those where the brokerage reports the cost basis to the IRS. Non-covered shares are those where the brokerage does not. Most RSU shares are non-covered, which means the burden of reporting the correct cost basis falls on you.
Can I choose which RSU shares to sell first?
Yes. You can elect specific identification of lots, which lets you choose which vesting lots to sell. This gives you control over the tax outcome. You do not have to use the brokerage's default FIFO method.
What happens if the IRS sends me a notice about RSU cost basis?
The IRS will send a CP2000 notice proposing to tax the full sale amount as a gain. You can respond by providing the corrected cost basis, the vesting dates, and the vesting prices. An enrolled agent or tax strategist can handle this on your behalf.
The difference between a preparer who files your return and a strategist who keeps your RSU reporting right is a single phone call. If you're holding a concentrated position in your employer's stock and want to make sure the cost basis is handled correctly, we can help.
Call us at (619) 280-2700 or email info@RoadmapTax.com to book a free 15-minute discovery call. We serve clients in San Diego, Frisco, and Panama City Beach, and work with clients nationwide.
