Selling RSU shares is not the end of the tax story. How your cost basis is reported can result in paying taxes on income that was already taxed at vesting. Here is what to look for and how to protect yourself.
When you sell RSU shares, your broker sends you a 1099-B reporting the proceeds. What that form shows for your cost basis determines how much of your gain is subject to capital gains tax. The problem is that brokers frequently report an incomplete cost basis for RSU shares, which can make it look like your entire sale proceeds are taxable as a gain, even though a significant portion was already taxed as ordinary income when the shares vested.
This is one of the most overlooked and consequential tax issues in equity compensation planning for women in tech, and it is entirely avoidable with the right records and a clear understanding of how cost basis works for RSUs.
What Cost Basis Means for RSUs
Cost basis is the starting value used to calculate your gain or loss when you sell an asset. For most investments, your cost basis is what you paid for the asset. RSUs are different because you did not pay anything for the shares. They were granted to you as compensation and delivered at vesting.
For RSU shares, your cost basis is the fair market value of the shares on the date they vested. This is the same value that was treated as ordinary income on that date and included in your W-2. You have already paid income tax on that amount. It is not taxable again.
When you sell the shares, only the difference between your sale price and your cost basis is subject to capital gains tax. If you sell for more than the vest-date value, you have a gain. If you sell for less, you have a loss.
💡 Key Concept
Your cost basis for RSU shares is the fair market value on the vest date, not zero. Using zero as your cost basis would mean paying capital gains tax on income that was already taxed as ordinary income at vesting. The two events are separate and should be reported separately.
Why the 1099-B Can Understate Your Cost Basis
Brokers are required to report cost basis information on the 1099-B they send you after a sale. For RSU shares, however, the rules around what brokers are required to include have historically created gaps.
For shares that vested before a certain date, brokers were not required to report cost basis information to the IRS at all, only the gross proceeds. For more recently vested shares, brokers may report a cost basis, but they may report only what was paid for the shares, which for RSUs is zero, rather than the fair market value at vesting that should serve as your actual cost basis.
The result is a 1099-B that shows your full sale proceeds with an incomplete cost basis. If you simply enter that information as reported without adjustment, your tax software or preparer will calculate a capital gain on the full proceeds, even though a large portion of that amount was already reported as income on your W-2 and taxed accordingly.
This is not an error that the IRS will automatically correct. It is a reporting limitation that puts the responsibility on you to report the correct cost basis and explain any adjustments on your return.
Short-Term vs. Long-Term Capital Gains on RSU Shares
Once you understand that your cost basis is the vest-date fair market value, the next question is how any additional gain above that value is taxed. The answer depends on how long you held the shares after vesting.
Shares sold within one year of the vest date produce a short-term capital gain on any appreciation. Short-term gains are taxed at ordinary income rates, the same rates that apply to your salary.
Shares held for more than one year after the vest date produce a long-term capital gain on any appreciation. Long-term capital gains rates are generally lower than ordinary income rates for most taxpayers, though the specific difference depends on your income level and tax situation.
The holding period clock starts on the vest date, not the original grant date. This is an important distinction. A grant made several years ago does not mean the shares automatically qualify for long-term treatment. Each tranche of shares starts its own holding period clock on the date those specific shares vested.
📋 Planning Note
If you are considering holding RSU shares for potential long-term capital gains treatment, the relevant date is your vest date, not your grant date. Understanding which vest tranches have crossed the one-year threshold at any point in time is worth tracking if holding shares is part of your strategy.
How to Report RSU Sales Correctly
When you sell RSU shares and receive a 1099-B with an incorrect or incomplete cost basis, you will need to adjust the reported cost basis on your tax return. This typically involves reporting the sale on Schedule D and Form 8949, entering the proceeds as shown on the 1099-B, and then adjusting the cost basis to reflect the correct vest-date fair market value.
To make this adjustment accurately, you need records of your vest events, specifically the dates shares vested and the fair market value of the stock on each of those dates. Most equity platforms such as Fidelity, Morgan Stanley, Schwab, and Carta maintain this information in your account history. Your W-2 should also reflect the total RSU income reported for the year, which can serve as a cross-check.
If you used a share-withholding method to cover taxes at vest, a portion of your shares was sold at vesting to cover tax obligations. These transactions are typically reported on a 1099-B as well. Because the sale usually occurs at or near the vesting price, the resulting gain or loss is often minimal, but the transaction still needs to be reported.
Keeping Records That Protect You
The foundation of reporting RSU sales correctly is having clear records of each vest event. For every vest, it is worth documenting the vest date, the number of shares that vested, and the fair market value per share on that date. Your brokerage or equity platform typically stores this information, but having your own records is a useful backup, particularly if you change brokers or if records are difficult to retrieve years later.
If you have had RSU vests across multiple years and have not been tracking this, it is worth reconstructing the record now while the information is still accessible. Your W-2s from prior years and your equity platform transaction history are the primary sources.
⚠️ Things to Watch Out For
- Do not rely on the cost basis reported on your 1099-B for RSU shares without verifying that it reflects the fair market value at vesting. If the basis is understated or missing, correcting it can materially reduce your tax liability.
- If you sold RSU shares in prior years and did not adjust the cost basis, it may be worth revisiting those returns. In some cases, an amended return may be appropriate.
- Each vesting tranche has its own cost basis and holding period. If you sell shares from multiple vest dates in a single transaction, each tranche must be tracked and reported separately.
- Shares sold to cover taxes at vest (share withholding) are also reportable transactions. While any gain or loss is typically minimal, these sales still need to be included on your return.
- Tax software does not automatically adjust cost basis for RSU compensation. It will default to the information reported on the 1099-B unless you review and correct it.
🌿 The Valoria Perspective
Cost basis errors on RSU sales are common, consequential, and entirely fixable with the right information. The income tax at vesting and the capital gains tax at sale are two separate events that need to be treated separately. Keeping clear records of your vest history is one of the simplest things you can do to make sure you are only paying what you actually owe.
Post 1: What Is an RSU? A Plain-English Guide for Women in Tech |
Post 2: Vesting Schedules Explained |
Post 3: Double Trigger Vesting at Private Companies |
Post 4: The RSU Tax Bill Nobody Warned You About |
Post 5 of 5: RSUs and Cost Basis (You are here)
Not sure what to do with your RSUs?
I help women in tech build a clear, confident plan around their equity compensation.
Founder of Valoria Wealth Management. Maria specializes in financial planning for high-earning women in tech with equity compensation, with a focus on building long-term wealth, optimizing their tax situation, and creating more financial freedom in their lives.
This content is for informational and educational purposes only and is not intended as individualized financial, investment, or tax advice. Past performance is not indicative of future results. Any opinions expressed are as of the date of publication and may change. Please consult your financial advisor or tax professional regarding your specific situation before making financial decisions.
