Should stocks to sell to cover stock withholdings has to be reported to IRS?

Forum|Forum|2 years ago
February 17, 2024
3 replies
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I had 40 units vested last year. 12 units were sold to cover tax withholdings. I still keep my 28 units unsold. This year, do I need to report this 12 units which was sold to cover taxes to IRS? It was not an actual income but in my consolidated 1099, it shows as Realized capital gain so I am confused. What if I do or do not file this?

TurboTax Deluxe Online

DianeW777

Yes. You must report the sale of stocks used to cover federal withholding. The stock's cost basis is equal to the FMV of the stock at the date of vesting.

It must be filed for the few shares that were sold. The cost basis and selling price could be close depending since it was sold close to or on the vesting date. This will be a short term sale.

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utkuAuthor

Thanks for your response. If I opted in net shares option to cover tax withholding automatically by my employer, would I still need to report that to IRS? There were basically 3 options as below. Because I opted in SELL TO COVER, it sold those 12 shares to cover the taxes so did I end up reporting this sale?

My other question, when I sell 28 units, would this be considered as income and I will have to report to IRS and pay taxes again? Would not it be double-taxing?

NET SHARES

Your employer withholds shares to pay your taxes.

SELL TO COVER

Shares are sold to pay your taxes and any commissions or fees.

CASH

Cash in your account is used to pay your taxes.

DianeW777

Yes, this is simply to eliminate an unexpected payment to the IRS and possibly state at tax time. They are still your vested stock that was sold after the vesting date.

28 remaining shares: it will not be double taxing. You will be allowed to use the full fair market value on the vesting date as the cost basis when you sell these shares. The tax will be only on the gain at that time or a loss would reduce your income should that be the result on the sales date.
It is a normal practice for employers to help you out by selling a few shares to cover your federal tax and report it to you as federal (and possibly state) withholding on your W-2.

If this took place in 2024 it will happen on that W-2 and 2024 tax return, if it happened in 2023, it will be reported in 2023.

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utkuAuthor

Thanks, I understand it will not be double taxing when I sell the remaining shares.

So, either my employer withholds shares and report under W2 or I selected sell to cover option which happened in this case and sold those 12 units to cover the taxes, I have to report this to IRS using 1099-B as it shows realized capital gain. In the summary page, it shows $0 realized capital loss/gain though.

It is not shown in my W2 because I opted in "Sell to cover" option so 1099-B was issued by my investment company after it was sold in 2023 at the same day it vested. Is that correct? It is still weird that it is considered as taxable income as it was sold to pay the taxes. 1099-B forms says this is not reported to IRS.

I am just trying to figure out of if it was already under W2, would I still need to report 1099-B separately?

My apologies if my questions do not make sense.

maglib

Employee

@utku

Any compensation income received from your employer in the current year is included on your W-2 in Box 1.

If you sold any stock units to cover taxes, this information is included on Form W-2 as well. Review Boxes 12 and 14 as they list any income on Form W-2 related to your employee stock options.

If there is no 1099-B there is no sale required to be reported. The IRS tried to make this process easier as there should be 0 or deminimis loss once you add the income portion to the basis, possibly a small loss due to fees.

Stock options granted in connection with the performance of services.

If an employee, former employee, or other service provider, in connection with the performance of services, obtains substantially vested shares of stock from the exercise of a stock option, and sells that stock through a broker on the same day, then the broker may not be required to report the sale on Form 1099-B. For details, see Rev. Proc. 2002-50, which is on page 173 of Internal Revenue Bulletin 2002-29 at IRS.gov/pub/irs-irbs/irb02-29.pdf.

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