A Google employee sells $200,000 worth of RSU shares, shares that vested at $200,000, already reported on her W-2 as ordinary income, already withheld and paid. Her broker’s Form 1099-B shows cost basis: $0. Proceeds: $200,000. Reported gain: $200,000. Her tax software calculates capital gains on $200,000 of income the IRS already collected at vesting. The result: a second tax on the same income. For a California employee in the highest federal and state brackets, this error costs approximately $66,600 in additional tax on money already fully taxed.
The IRS does not flag this error. Tax software does not catch it. Most return preparers do not look for it unless they specifically check RSU transactions against vesting documentation. It appears regularly across Fidelity, Schwab, Morgan Stanley, E*TRADE, and every other major equity plan brokerage because the error is structural, not a brokerage failure.
What Is the RSU Cost Basis Trap?
The RSU cost basis trap occurs when a brokerage reports $0 or an incorrect cost basis on Form 1099-B for RSU shares sold. The correct basis is the fair market value of the shares on the vest date, the same amount already included as W-2 income and taxed at ordinary income rates. Filing without correcting this basis on Form 8949 causes the taxpayer to pay capital gains tax on the same income a second time. The error is common but not universal. Some brokers do report the correct basis. Verify your Form 1099-B against your vesting documentation for every RSU sale.
Who Has This Problem
You should verify your cost basis if you sold RSU shares in any year since joining a California technology company and did not separately confirm the basis on your Form 1099-B against your brokerage’s vesting documentation. The error affects employees at Apple, Meta, Amazon, Salesforce, Google, Microsoft, Nvidia, Tesla, and any company that pays equity compensation through major plan administrators, because the cause is in how those administrators transfer shares to brokerages, not in the company’s payroll.
ALERT: RSUs do not generate Form 3922.
That form applies exclusively to ESPP purchases under IRC §423. For RSU cost basis, use your brokerage’s Stock Plan Transaction Supplement, Vesting Confirmation, or Confirmation of Release from Schwab Equity Awards, Fidelity NetBenefits, Morgan Stanley at Work, or E*TRADE. If your tax software references Form 3922 for RSU basis, that is an error.
Why Brokers Report the Wrong Basis
When RSUs vest, your employer uses sell-to-cover to fund the withholding obligation, selling enough shares to remit 22% federal and 10.23% California supplemental withholding. The remaining shares are deposited to your brokerage account. The brokerage receives the shares but may not receive the vest-date fair market value, the figure that constitutes your tax basis and was included in your W-2.
Your W-2 income from the vest is processed through your employer’s payroll system. The brokerage processes the share transfer. These two systems frequently do not communicate the vest-date FMV. The result: the Form 1099-B may show $0 basis, an incorrect historical figure, or occasionally the correct FMV. When it is wrong, and no adjustment is made on Form 8949, the entire sale proceeds become reported gain, taxing the vesting income a second time.
The California Capital Gains Dimension
California taxes long-term capital gains at ordinary income rates. There is no California preferential rate for long-term capital gains. A California employee who incorrectly reports $200,000 in capital gain pays California income tax on $200,000 of phantom gain at up to 13.3%, an additional $26,600 on top of the federal capital gains tax error.
- Federal LTCG tax on 200,000phantomgain(highestbracket):~40,000
- California ordinary income tax on same 200,000(13.3%):~26,600
- Total double-taxation cost: ~$66,600
All on income already reported on your W-2 and taxed at vesting.
Where to Find Your Correct Basis
Do not use Form 1099-B to establish your RSU cost basis. Use your brokerage’s equity award documentation: the Stock Plan Transaction Supplement, Vesting Confirmation, or Confirmation of Release. This document shows the vest date, the fair market value per share on that date, and the number of shares released. That per-share FMV, multiplied by the shares sold from that lot, is your correct cost basis.
If you sold shares from multiple vest dates, each lot carries the FMV from its own vest date as its basis. They cannot be combined.
Five Steps to Correct the Error
Step 1. Obtain Your Equity Award Documentation
For each year in which you sold RSU shares, obtain the Stock Plan Transaction Supplement or Vesting Confirmation from your equity plan administrator. If you cannot locate it, request it from your employer’s HR or stock plan department.
Step 2. Match Each Sold Lot to Its Vest Date
Your brokerage’s equity award summary shows which vest date corresponds to which shares.
Step 3. Calculate the Correct Cost Basis
Calculate the correct basis for each lot: FMV per share on vest date × number of shares sold from that lot.
Step 4. Correct the Basis on Form 8949
On Form 8949, enter each lot. In column (e), enter the proceeds. In column (f), enter basis adjustment code B if the broker reported an incorrect basis. In column (g), enter the adjustment: correct basis minus reported basis. This reduces the reported gain to the correct amount, which may be zero.
Step 5. Amend Previously Filed Tax Returns
If the error occurred in a prior year, file Form 1040-X for federal and Form 540X for California. The three-year statute of limitations means a 2023 error can be corrected through approximately April 2027.
Keep your vesting documentation permanently. When a large Form 8949 adjustment reduces a reported capital gain to zero, the IRS may request supporting documentation. Having the vesting confirmation on file makes that request straightforward to answer, whether you respond yourself or through IRS representation.
What Capital Tax Does
Capital Tax reconciles each client’s RSU vesting history against their Form 1099-B reported basis at year-end. Where brokers have reported incorrect basis, we prepare the Form 8949 adjustments and identify prior years where the same error produced overpayments. We file Form 1040-X and Form 540X to recover overpaid taxes with applicable interest. We have corrected this error on returns for employees at Apple, Meta, Amazon, Salesforce, Google, and Microsoft.
Review Your RSU Cost Basis Before Filing
If you sold RSU shares in the past three years and did not verify the cost basis on your Form 1099-B against your brokerage’s vesting documentation, your returns may reflect overpaid tax. Begin your RSU Basis Review through our tax planning for executives service. Bring your Form 1099-B and equity award vesting documentation for every year in which you sold RSU shares.
Frequently Asked Questions
Why does my Form 1099-B show $0 cost basis for RSUs?
The brokerage that holds your shares often doesn’t receive the vest-date fair market value from your employer’s payroll system. Without that figure, it may report $0 or leave the basis blank. Your real basis is the value of the shares on the vest date, which was already included in your W-2 income.
What is the cost basis of RSU shares?
Your cost basis is the fair market value per share on the vest date, multiplied by the number of shares you received. This is the same amount your employer reported as ordinary income on your W-2. Each vest date creates a separate lot with its own basis.
Are RSUs taxed twice?
They shouldn’t be. RSUs are taxed once as ordinary income at vesting. When you sell, only the change in value after vesting is a capital gain or loss. Double taxation happens only when the $0 or incorrect basis on Form 1099-B goes onto your return without an adjustment on Form 8949.
How do I report RSU sales on my tax return?
Report each sale on Form 8949. Enter the proceeds from Form 1099-B, use adjustment code B if the reported basis is wrong, and enter the difference between the correct basis and the reported basis in column (g). The totals then flow to Schedule D.
Where can I find the vest-date value of my RSUs?
Check your equity plan portal for the Stock Plan Transaction Supplement, Vesting Confirmation, or Release Confirmation. Schwab Equity Awards, Fidelity NetBenefits, Morgan Stanley at Work, and E*TRADE all provide these. They show the vest date, the per-share value, and the number of shares released.
Do I owe tax on the shares sold to cover withholding at vesting?
Usually very little. Sell-to-cover shares are sold at or near the vest-date price, so the gain or loss is typically small. These sales often still appear on Form 1099-B, so check that their basis is correct too.
If I sell RSUs right after they vest, do I owe capital gains tax?
Generally only on the price movement between the vest and the sale, which is often minimal. If the 1099-B shows $0 basis, though, the full sale amount will look like a gain unless you correct it on Form 8949.
Are gains on RSU shares short-term or long-term?
The holding period starts on the vest date. Shares held more than one year after vesting qualify for long-term federal rates. Shares sold within a year are short-term and taxed at ordinary rates. In California, both are taxed as ordinary income.
Can I fix an RSU cost basis error from a previous year?
Yes. File Form 1040-X for your federal return and Form 540X for California. A federal refund claim generally must be filed within three years of the original filing date, or within two years of paying the tax if that’s later.
Is 22% federal withholding enough to cover RSU tax?
Often not. Supplemental wages, including RSU income, are withheld at a flat 22% federal rate (37% above $1 million). High earners in the 32%–37% brackets can owe more at filing. California withholds 10.23%, which can also fall short of the top 13.3% rate.