Tax Reporting for Restricted Stock & RSUs

 A newly updated article in the Tax Center on myStockOptions.com warns readers about ten errors that can all too easily occur on tax returns involving restricted stock and RSUs. (See Restricted Stock & RSUs: What You Must Know To Avoid Tax Return Mistakes In 2011.)

Among the most common blunders:

• double-counting restricted stock income by not including the vesting income (reported on Form W-2) in the tax basis at sale


• not reporting any income until the full grant is vested


• double-counting dividend income


• failing to report a stock sale when there is no gain over what appears on the W-2


• reporting the cost basis as $0 because nothing was "paid" for the stock

As the article warns, the IRS has expanded its technology over the past few years and can now easily match and compare e-filed information documents, such as Forms W-2 and 1099-B, making accurate tax reporting more important than ever.

Given that many companies require share surrender or make it the default choice for withholding, the article explains a related mistake that employees commonly make: reporting too many shares sold by using the full number of shares in the grant and not the net they received. When employees sell the remaining shares in their grant, they must remember to exclude from their Schedule D at that time the shares used earlier for taxes. Otherwise, if they forget that they technically "sold" stock in the share surrender, they may end up reporting on Schedule D more shares than they actually sold.

Example: The employee receives a grant of 10,000 shares but actually acquires only 7,500 because of the share surrender. The W-2 reports the value of the stock when the shares were delivered at vesting. When the company stock is sold two years later, the employee reports the value of the 10,000 shares as the tax basis, not realizing that the 2,500 were technically "sold" at the time of vesting/share delivery to cover the taxes. Instead, the employee should report just the value of the 7,500 sold shares on the Schedule D.

An FAQ in the section Reporting Company Stock Sales illustrates this point with an annotated example of Schedule D.