counting money for tax savings
counting money for tax savings

Basis in the World of Tax: Stock Basis

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Thanks for tuning back into my series on basis. In this article, we’ll focus on stock basis and stock options.

Stock Basis

Usually, the broker will provide basis. However, if the shares are not covered, the broker does not have to provide basis. Covered shares are shares purchased on or after Jan. 1, 2012. Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, will provide cost basis information for covered shares to both the shareholder and the IRS. Non-covered shares are shares purchased on or before Dec. 31, 2011.

The fair market value of securities traded on an exchange is ordinarily the average of the high and low quoted prices on the valuation date. If only a small number of shares are traded on that date or if other abnormal market conditions exist, such as an unexpected crash or trading stop, then an alternative method may be necessary to calculate fair market value.

If the stock is inherited, fair market value at the date of death becomes the new basis, unless the alternative valuation date is used. If that is the case, then all assets get fair market value on that date, six months after the date of death. That means that some items might get stepped up basis and others might get stepped down basis.

If the stock was a spin-off from another stock, then a spin-off calculator is very useful. It will show the original stock that the spin-off originated from. For example, Lucent is a spin-off of AT&T, but if the client doesn’t know how many shares of Lucent appeared in his stock portfolio, you can use a spin-off calculator to help determine this.

If the stock is not held at a brokerage, but rather in stock certificates, a call to investor relations is likely the only way to determine basis. Some taxpayers will have the same stock in an account with the company and some shares with a brokerage.

Stock Options

First, you need to determine what type of stock option it is and request all paperwork from the taxpayer. Some of the gain may already be included in the W-2, and Form 1099-B will not show the correct adjusted basis.

Here are some indicators that the taxpayer sold stock options:

  • Look for “Code V” in box 12 of the W-2. Gain from the exercise of a stock option is included on Form W-2 code V – Income from exercise of non-statutory stock options — in boxes 1, 3 (up to Social Security wage base) and 5, and noted in box 12 with “Code V.”
  • Check box 14 of Form W-2 for any stock sale indicators.
  • Ask for the Employee Stock Exercise Confirmation.
  • Check Form 1099-B for stock sales of the taxpayer’s company.
  • Ask for paperwork from shareowner services.
  • Look for Form 3921, Exercise of an Incentive Stock Option, under Sec. 422(b), as well as Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan, under Sec. 423(c).

A same-day sale allows the employee to simultaneously exercise the option and sell the stock. The employee is not required to pay for the stock up front, but receives cash for the difference between the exercise price and the fair market value of the stock, less the required withholding.

The proceeds are reported on Form W-2 as wages and again as proceeds from a stock sale on Form 1099-B. The tax professional must make sure not to report the gain twice.

The “bargain element” – the difference between the exercise price and the fair market value of the stock – is taxable as wages, and subject to federal and state taxes as well as Social Security and Medicare withholding taxes. The bargain element is included in box 1 of Form W-2 and shown in box 12 with code V.

Since the income has already been included as compensation and is also reported to the IRS on Form 1099-B, the sale must be reported on Form 8949, Sales and other Dispositions of Capital Assets, and then on Schedule D. If not reported, the IRS will send out a CP-2000 letter. The bargain element will show on Form 8949 in the adjustments column.

Basis of a same-day sale is the amount paid for the stock plus the amount of the bargain element included on Form W-2, Code V.

Please note that many tax professionals incorrectly report the stock basis by neglecting to add the bargain element to the cost basis in the adjustments column of Form 8949.

Historical Stock Data

These websites may be helpful in locating historical stock data:

Please continue staying tuned to the Intuit® ProConnect™ Tax Pro Center for the rest of my series on basis.

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