A broker’s 1099-B always reports what you sold shares for. It does not always report what you paid for them, and when it does, the figure is sometimes wrong. The gap lands on you, because the IRS taxes the difference between the two, and a missing cost makes the whole sale look like profit.
The three places it goes wrong most often are shares from your employer, shares bought long ago or moved between brokers, and wash sales the broker cannot see. All three can be fixed on the return, and October is the right time to find them.
What the 1099-B is telling you
For each sale, Form 1099-B gives the proceeds, the date sold, and usually the date acquired and a cost basis. It also says whether that basis was reported to the IRS.
That last point decides where the sale goes on Form 8949. Short term sales with basis reported go in box A, and without it in box B. Long term sales use D and E. Totals then carry to Schedule D, which is explained on its own in capital gains, short term and long term.
When the broker’s basis is wrong, what you do depends on whether that basis was reported to the IRS. Where it was, in box A or D, you enter the broker’s figure as shown, mark the line with code B, and correct it in the adjustment column, so the return shows both the reported number and your correction. Where it was not, in box B or E, you enter the correct basis directly, still mark it with code B, and enter no adjustment.
Shares from your employer: taxed twice by default
This is the single most expensive error on this form.
Restricted stock units are taxed as pay when they vest, and that value is on your W-2 for that year. A nonqualified share purchase plan works the same way on the date of purchase. A qualified employee stock purchase plan does not: nothing is taxed when the shares are bought, and the compensation part of the discount is recognized in the year you sell, in an amount that depends on how long you held the shares. Either way, the 1099-B for the sale often shows a basis of zero, or nothing at all, or only the price you paid, because the broker’s system does not know about the income your employer reported.
If the return is filed as the 1099-B reads, the same income is taxed twice: once as wages and again as a capital gain. The IRS instructions are plain that your basis is increased by the amount you included in income. The fix is the code B treatment above, using the value from your employer’s records, which your plan administrator’s supplemental statement usually sets out. For a sale of qualified plan shares, also check that the compensation part is on the W-2 for the year of sale. Where it is not, it still has to be reported as wages.
People miss it because nothing looks wrong. The sale appears with a large gain, the software accepts it, and the tax is simply higher than it should be.
Old shares, and shares that moved brokers
Stock bought after 2010 is a covered security, and brokers must report its basis to the IRS. Stock bought earlier, and some shares transferred in from another broker, are often reported as noncovered, with the basis left blank.
A blank basis is not zero. It means you have to supply it. The records that prove it are the original purchase confirmations, old account statements, or for inherited shares the value at the date of death, and they have usually been thrown away.
When they are gone, the work is reconstruction: the old broker’s archived statements, dividend reinvestment records, historical prices for the purchase date where the date is known. A reasonable, documented figure is better than a blank, and a blank is the version that becomes a notice. What a notice about a sale like this looks like, and how to answer it, is covered in what an IRS notice means.
Wash sales the broker cannot see
A wash sale happens when you sell at a loss and, within 30 days before or after, buy substantially identical stock. The loss is not allowed on that sale.
The common belief is that the loss is lost. Usually it is not. The disallowed loss is added to the basis of the replacement shares, and the holding period carries over with it, so the loss comes back when you sell the new shares.
There are two things brokers do not tell you. First, the rule covers purchases in other places: shares your spouse buys, and shares bought in your IRA or Roth IRA. Your broker reports only wash sales inside the one account it can see.
Second, and stronger than the usual advice: when the replacement shares are bought in an IRA or Roth IRA, no basis adjustment is made. In that case the loss really is gone.
Employer stock creates wash sales too. A vesting award of the same company’s shares within 30 days of selling others at a loss is a wash sale, even though you did not choose to buy anything.
Selling US stock as a nonresident or a new arrival
How a sale is taxed here depends on residency, not on the form.
A nonresident is generally not taxed on US capital gains from selling stock if they were in the US for fewer than 183 days in the year. At 183 days or more, the net gain is taxed at a flat 30 percent, or a lower treaty rate, with no lower long term rate.
That second case catches students. An F-1 or J-1 student can be a nonresident for residency purposes while physically in the US for most of the year, because their days are excluded from the residency test. They are not excluded from this one. A student here all year who sells shares at a gain is a nonresident and still owes the 30 percent tax.
Whether the broker issues a 1099-B at all depends on how the account is documented. A broker holding a valid Form W-8BEN that treats you as a foreign person generally does not have to report the sale, and one that still treats you as a US person will. Neither the statement nor its absence decides the tax, and a nonresident who files a resident return by mistake gets the wrong answer in one direction or the other. Which return applies is covered in Form 1040-NR and how it differs from 1040.
In a dual status year, the first year of residency for many people, each sale has to be placed on the correct side of the residency date. A sale before it follows the nonresident rules, and a sale after it is taxed as a resident. The 1099-B does not split the year for you. How the residency date is found is set out in resident, nonresident, or dual status.
What to do before the year ends
The reason this guide runs in October is that most of this can still be fixed while the year is open.
- Download the realized gains report from each brokerage account now, not in February.
- Look for any line with a blank or zero basis, and for any equity compensation sale.
- Ask your old broker for archived statements while the account still exists and someone still answers.
- Before selling at a loss for tax reasons, check what is being bought in your IRA, your spouse’s account and your employer’s vesting schedule during the next 30 days.
Where the sales are many, or the records are thin, sorting this out is part of preparing an individual return.