The Setup
Where your RSU income actually shows up
RSUs are taxed as ordinary income at vest — not at grant, not when you sell. The taxable amount is simple: shares vested × fair market value (FMV) on the vest date. If 200 NVDA shares vest at $140, that's $28,000 of ordinary income, and it hits your paycheck the same way salary does. For the full mechanics, see how RSUs are taxed.
Here's the part that trips people up: that $28,000 is already in your W-2 Box 1. Your employer ran it through payroll, withheld federal/FICA/state, and the broker likely sold shares to cover the withholding. The income reporting is done before you ever touch a tax form. Your only job at filing time is to report the sale of shares correctly — and that's where the trap is set.
| Form / Box | What it reports | What it means for you |
|---|---|---|
| W-2 Box 1 | Total wages — includes your RSU vest value | Income already taxed. Nothing to do. |
| W-2 Box 3 & 5 | Social Security & Medicare wages (FICA on the vest) | Withheld at vest. Informational. |
| W-2 Box 14 | Often labeled "RSU" — the vested value, broken out | INFORMATIONAL ONLY. Not a separate tax. Already in Box 1. |
| 1099-B (broker) | Proceeds from shares you sold — often with $0 cost basis | THE TRAP. Basis is usually wrong. You must fix it. |
| Form 8949 | Per-lot sale: proceeds, cost basis, adjustment, gain/loss | Where you correct the basis (code B). |
| Schedule D | Summary of total short- and long-term capital gains | Rolls up from Form 8949. Flows to your 1040. |
Box 14 is the most-misread line on the whole W-2. When you see "RSU $28,000" there, your instinct is to think it's an extra tax or extra income to enter somewhere. It isn't. It's your employer showing you, for reference, how much of Box 1 came from restricted stock. You enter it where your software asks, and it changes nothing on your return.
The Trap
Why your 1099-B double-taxes you
When you sell vested RSU shares, your broker — Schwab, E*Trade, Fidelity, Morgan Stanley — sends you a 1099-B reporting the proceeds. The problem is the cost basis. For shares acquired through equity comp, brokers are restricted by IRS rules from reporting the full basis on the official 1099-B. So they report the cost basis as $0, or sometimes only the small discount portion. Often the basis box is even left blank.
Your tax software imports that 1099-B and takes it at face value. If basis is $0, the software computes your capital gain as the entire sale proceeds — as if the shares cost you nothing. But they didn't cost you nothing. You already paid ordinary income tax on the FMV at vest. The software just taxed that same money a second time, now as a capital gain.
The #1 RSU filing mistake: A $0 cost basis on your 1099-B means your tax software is treating money you ALREADY paid income tax on as a brand-new capital gain. On a $50,000 sale with $0 reported basis, that's $50,000 of phantom gain — and at a 32% combined rate, roughly $16,000 of tax you do not owe. The IRS will not flag this in your favor. You have to catch it and fix the basis yourself.
Selling 350 vested NVDA shares for $52,500 (basis was $49,000 at vest)
$0 basis (left as-is)
$16,800
tax on the sale
Software sees $52,500 proceeds − $0 basis = $52,500 "gain." At a 32% combined rate, that's ~$16,800 in tax — on money already taxed at vest.
Corrected basis = FMV at vest
$1,120
tax on the sale
$52,500 proceeds − $49,000 true basis = $3,500 actual short-term gain. At 32%, that's ~$1,120. The real economic gain, taxed once.
The Overpayment: Same sale, same shares. The only difference is whether you correct the cost basis. Leaving the broker's $0 basis in place hands the IRS ~$15,200 in tax you never owed — on a single lot.
Difference: roughly $15,200 overpaid on one lot. Multiply that across several vest tranches sold in a year and the number climbs fast. This is not an edge case — it is the default outcome if you import a 1099-B and click through without correcting basis.
Your True Basis
How to find your correct cost basis
Your correct cost basis is the amount you already paid tax on: shares acquired × FMV per share on the vest date. That's the same FMV your employer used to compute the income in Box 1. You're not inventing a number — you're recovering the one the IRS already has. The catch is that the broker doesn't print it on the official 1099-B, so you have to pull it from one of these sources.
Vest confirmation / release statement — emailed or posted in your equity portal each time a tranche vests; lists shares released and FMV per share
Supplemental 1099-B info — most brokers include a "Supplemental" or "Stock Plan" statement alongside the official 1099-B with the ADJUSTED (true) cost basis filled in
Stock Plan / Equity Award detail in Schwab, E*Trade, Fidelity, or Morgan Stanley — a per-lot cost basis report you can export
Your final pay stub or W-2 Box 14 to cross-check the total RSU income recognized for the year
If all else fails: shares × closing price on the vest date (or the FMV your plan uses) — confirm the convention with your stock plan administrator
The single best source is the broker's own supplemental statement. Schwab, E*Trade (Morgan Stanley), and Fidelity all publish one. It shows the exact "adjusted cost basis" per lot — the FMV-at-vest figure you need. The official 1099-B says $0 or shows only the discount; the supplemental statement says what you actually paid. Use the supplemental number.
| Holding period (from vest date) | Tax treatment on the gain |
|---|---|
| Sold within 1 year of vesting | Short-term — taxed at ordinary income rates (up to 37% federal) |
| Sold more than 1 year after vesting | Long-term — 0/15/20% + 3.8% NIIT, far lower |
| Sell-to-cover shares (sold at vest) | Essentially $0 gain — sold same-day at vest FMV; tiny gain/loss only |
Note that your clock starts at the vest date, not the grant date. Shares sold the same day they vest (sell-to-cover) have basically zero gain because the sale price equals the FMV that set your basis — yet brokers still often report those with $0 basis, generating a phantom gain equal to the full proceeds. Those same-day lots are the most commonly double-taxed of all.
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The Fix
Fixing the cost basis in TurboTax, step by step
The fix is the same in every major tax product — you adjust the cost basis on Form 8949 so the gain reflects only your real economic gain. TurboTax buries the path a little, so here's exactly where to click.
Import or enter the 1099-B, then STOP
Go to Wages & Income → Investments and Savings (1099-B) and import from your broker (Schwab, E*Trade/Morgan Stanley, Fidelity). Do not breeze past the summary — the imported basis is the problem you're here to fix.
Open the RSU sale and choose to review/edit each lot
Find the equity-comp sales (often flagged "needs review" or showing employee stock). Select Edit on the lot. When TurboTax asks if this sale involves employee stock, say yes — this unlocks the RSU adjustment path.
Check "The cost basis is incorrect or missing on my 1099-B"
TurboTax presents this exact checkbox (or "I need to adjust my cost basis"). Tick it. This is the door to entering the real basis the broker omitted. You are not committing fraud — you're applying adjustment code B, exactly as the IRS intends.
Enter the correct basis = shares × FMV at vest
From your supplemental statement or vest confirmation, enter the true cost basis (the adjusted cost basis figure). TurboTax recomputes the gain as proceeds − true basis. Your reported gain should drop to the real, small number — or to roughly $0 for same-day sell-to-cover lots.
Verify on Form 8949 and Schedule D
Preview the return. On Form 8949, column (e) should show your corrected basis and column (g) the adjustment with code B. Schedule D should now reflect only your real gain. If the gain still equals the full proceeds, the basis didn't save — go back into the lot and re-enter.
Do
- Use the adjusted cost basis from your broker's SUPPLEMENTAL statement — it already reflects FMV at vest
- Fix every RSU lot, including same-day sell-to-cover shares (those are the most often double-taxed)
- Keep your vest confirmations and supplemental 1099-B with your tax records in case of a question
- Cross-check that total corrected basis roughly equals the RSU income reported in W-2 Box 14
- Amend a prior year (Form 1040-X) if you spot this on returns you already filed — the overpaid tax is refundable within the statute of limitations
Don't
- Don't accept the imported $0 (or discount-only) basis — that is the entire double-tax trap
- Don't enter Box 14 RSU as additional income — it's informational and already in Box 1
- Don't change the PROCEEDS figure — only the cost basis needs correcting
- Don't guess the basis if a supplemental statement exists — use the broker's adjusted figure
- Don't skip the "employee stock" question in the software — it's what unlocks the adjustment path
Worked Example
Real numbers: one engineer, three vest tranches
You're a senior engineer at a public tech company. Over the year, three RSU tranches vested and you sold shares from each. Your employer already reported $86,000 of vest income in W-2 Box 1 (and noted it in Box 14). Now the broker's 1099-B lands — with $0 cost basis on all three lots.
| Lot (sold during the year) | Proceeds / True basis (FMV at vest) | Reported gain: $0-basis vs corrected |
|---|---|---|
| Q1 vest — sold same-day (sell-to-cover) | $31,000 / $31,000 | $31,000 vs $0 |
| Q2 vest — sold 4 months later | $29,500 / $27,000 | $29,500 vs $2,500 |
| Q3 vest — sold 2 months later | $28,200 / $28,000 | $28,200 vs $200 |
Total across all three lots
Broker's $0 basis (uncorrected)
$88,700
reported capital gain
$88,700 of "gain" the software invents because it thinks the shares cost nothing. At ~32% combined, that's roughly $28,400 in tax.
Corrected basis on Form 8949
$2,700
reported capital gain
Your only real gain is post-vest appreciation: $0 + $2,500 + $200. At ~32%, about $864 in tax. A swing of ~$27,500.
What the fix is worth: Leaving the basis at $0 reports $88,700 of phantom short-term gain. Correcting it reports the real $2,700. At a 32% combined rate, the difference is about $27,500 — tax you'd pay on income you already paid tax on at vest.
Same shares, same sales, same IRS rules. The only variable is whether you opened each lot and corrected the basis. That's the entire value of understanding this one mechanic — and why it's worth pulling your supplemental statement before you file.
Before You File
Documents to gather before you touch your return
W-2 — confirm Box 1 wages and note the RSU amount in Box 14 (informational)
Official 1099-B from your broker — the one with $0 or discount-only basis
Supplemental / Stock Plan 1099-B statement — the one with ADJUSTED cost basis
Vest confirmations / release statements for every tranche that vested
A per-lot record of vest date, shares, and FMV at vest (the true basis)
Sale confirmations showing proceeds and trade dates (for short- vs long-term)
Prior-year returns — to check whether you double-paid before and should amend
Once the return is filed and the basis is correct, the bigger question shifts from reporting to holding. Every vested tranche you keep adds to a single-stock position that's already been fully taxed at vest. If that concentration is climbing past where you're comfortable, see diversifying a concentrated RSU position — and note that selling to diversify triggers a second tax event on the post-vest gain, which is exactly the problem Embark's §721 income strategy is built to avoid.
FAQ
RSU reporting questions, answered
Do I owe tax on W-2 Box 14 "RSU"?
No. Box 14 is informational. It breaks out how much of your Box 1 wages came from RSUs that vested. The tax was already withheld and the income is already counted in Box 1. Enter it where your software asks; it won't change your return.
Why does my 1099-B show $0 cost basis?
IRS rules limit what brokers can report as basis on equity-comp shares, so they default to $0 (or only the discount). It's not a mistake on the broker's part — it's the rule. Your job is to supply the true basis (FMV at vest) on Form 8949. Brokers publish that figure on a separate supplemental statement.
What is my real RSU cost basis?
Shares acquired × FMV per share on the vest date — the same value your employer used to compute the income in W-2 Box 1. That income was already taxed, so using it as basis ensures you're not taxed on it twice.
Is correcting the basis legal / will it trigger an audit?
It's the correct, IRS-intended treatment. Form 8949 has adjustment code B specifically for "basis reported to the IRS was incorrect." You're matching the proceeds the IRS sees with the true basis. Keep your supplemental statement and vest confirmations on file as support.
I think I overpaid in a prior year — can I get it back?
Yes. File Form 1040-X to amend the affected year and correct the cost basis. You can generally amend within three years of filing (or two years of paying the tax). If you double-paid, that overpayment is refundable.
Short-term or long-term — which applies to my RSUs?
Measured from the vest date. Sold within a year of vesting = short-term (ordinary rates). Sold more than a year after vesting = long-term (0/15/20% + 3.8% NIIT). Same-day sell-to-cover lots have essentially no gain. See our RSU overview or model the after-tax math in the calculator.
RSUs: The Complete Guide Series
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After the Vest
Generate Income on Your Vested RSU Position — Without Selling
Your RSUs were taxed at vest. Selling to diversify triggers a second tax bill on the gain. Embark's §721 SPV lets you contribute that concentrated position tax-free, target 10%+ annual income, and keep your upside.