RSU Taxation & the $0 Cost Basis Problem

Why your broker reports the wrong cost basis on RSU sales, how it creates phantom income, and how to fix it on your tax return.

How RSU Taxation Works

Restricted Stock Units (RSUs) are taxed in two stages. Understanding both stages is critical to avoiding the double-taxation trap:

The $0 Cost Basis Problem

Here is where things go wrong for many H-1B holders. When your broker sends Form 1099-B for the RSU sale, the cost basis is often reported incorrectly:

• $0 basis — The broker reports zero, making the entire sale price appear as gain
• Blank basis — The cost basis field is empty (Box 1e on 1099-B)
• Grant price as basis — Some brokers use $0 (the RSU grant price, which is always zero since RSUs have no purchase cost)

The IRS receives the same incorrect 1099-B data. If you file your return using the reported basis without correction, the IRS will accept it — and you will overpay. The IRS has no reason to question you paying more tax than owed.

How to Fix It

You correct the basis on Form 8949 by reporting the sale with the correct adjusted basis. Here is the process:

1. Find the vesting date FMV. Check your employer's equity portal (E*Trade, Fidelity NetBenefits, Schwab Equity Awards, Morgan Stanley StockPlan) for the "Release Market Value" or "Fair Market Value at Vest."
2. Calculate the correct basis. Basis = FMV on vesting date × number of shares sold. If you sold shares from multiple vesting lots, calculate each lot separately (FIFO order by default).
3. Report on Form 8949. Enter the sale with the broker-reported basis, then use column (f) adjustment code "B" (basis reported to IRS is incorrect) and column (g) to add the correct adjustment amount.
4. Cross-reference with your W-2. RSU vesting income is included in your W-2 Box 1 wages (and sometimes itemized in Box 14 as a memo entry). Verify that Box 1 includes the total vesting FMV for shares vested during the year. Note: Box 12 code V is for nonqualified stock option (NSO) income, not RSUs.

Same-Day Sale vs. Hold and Sell

The holding period for RSUs starts on the vesting date, not the grant date. This is important for determining whether your gain qualifies for long-term capital gains treatment.

Tax Withholding on RSU Vesting

When RSUs vest, your employer typically sells a portion of the shares to cover tax withholding. The standard supplemental income withholding rate is 22% federal (37% for amounts over $1 million in a year). State withholding is additional.

This "sell-to-cover" withholding is often insufficient for high earners, leading to an underpayment situation at tax time. If you have significant RSU income, consider making estimated tax payments to avoid underpayment penalties.

Common Mistakes

1. Filing with $0 cost basis. The most expensive mistake. Always correct the basis to the vesting-date FMV.
2. Using the wrong vesting-date price. Use the closing price on the vesting date (or the price your employer used for W-2 reporting), not the grant date price.
3. Forgetting to account for sell-to-cover shares. The shares sold for withholding are still a taxable event that needs Form 8949 reporting.
4. Mixing up lots. If you have multiple vesting dates, each lot has a different basis. Do not average them.
5. Not claiming wash sale adjustments. If you sell RSU shares at a loss and buy the same stock within 30 days, the wash sale rule (IRC §1091) applies and disallows the loss.

How Our Platform Handles This

H1B TaxFile includes automatic RSU cost basis correction:

• Import your 1099-B data and the platform detects RSU sales with $0 or incorrect basis.
• Enter your vesting dates and FMV from your equity portal, and the platform auto-calculates the correct basis per lot.
• Form 8949 is generated with the proper adjustment codes (B for basis not reported to IRS, or B for incorrect basis).
• W-2 Box 1 wages are cross-referenced to verify RSU income consistency (RSU income has no dedicated Box 12 code — Box 12 code V is for NSOs only).
• Schedule D aggregates all capital gains correctly, separating short-term and long-term.