The investment house should send a supplemental gain-loss report reflecting the adjusted cost basis. Without it, you're lost.

agreed, dig through that brokerage statement to the back for the supplemental basis info, theyre pretty good about including that these days.

MS did provide the cost basis, but the capital gain = the amount of the W-2 he received from his employer.  The employer withheld tax (included on the W-2) on the exercise of the options.  

right, he gets taxed on the W2 income, that's how he gets a "basis" in the stock,(the same as if he'd got the payroll check then paid for the stock out of pocket), then he'll have a gain or loss from the sale.

If youre seeing a large gain, be sure youre using the adjusted basis included in the supplemental pages of the brokerage statement.

When the company doesn't send correct or adequate paperwork (often happens)....  I use the sale date on the 1099B as the purchase date and use either the closing price/sh from the day before or opening price as the basis. it will generate a (very small) gain or loss on sch D.