When your hard-earned Restricted Stock Units (RSUs) vest, it's an exciting milestone! However, that excitement can quickly turn into a headache when tax season rolls around, especially if you opted for a "sell to cover" strategy. Don't worry, you're not alone. Many employees face confusion when reporting RSU income and sales on their tax returns, particularly with TurboTax. This comprehensive guide will walk you through the process step by step, empowering you to navigate the complexities with confidence.
The RSU Journey: From Grant to Tax Reporting
Before we dive into TurboTax, let's quickly recap how RSUs are taxed. It's a two-stage process:
Vesting: When your RSUs vest, the fair market value of the shares on that vesting date is considered ordinary income. Your employer includes this amount in your W-2 (usually in Box 1, and often also in Box 12 with code V). Taxes (federal, state, Social Security, and Medicare) are typically withheld at this point. With a "sell to cover" strategy, your employer sells a portion of your newly vested shares to cover these immediate tax obligations.
Selling (Post-Vesting): If you sell the remaining shares (or even the "sell to cover" shares, though that's less common to have a separate gain/loss on those), any difference between the sale price and the fair market value at the time of vesting is treated as a capital gain or loss. This is where your Form 1099-B comes into play. The crucial part here is making sure your cost basis is accurate to avoid being double-taxed on the income you already reported on your W-2.
Now, let's get into the nitty-gritty of reporting this in TurboTax.
Step 1: Gather Your Essential Documents (Engage!)
Alright, before you even think about opening TurboTax, let's play a little game of "Tax Document Treasure Hunt"! Find the following items and have them ready:
Your W-2 Form: This is crucial as it reports the income from your vested RSUs. Look for the RSU income typically included in Box 1 (Wages, Tips, Other Compensation) and often specifically noted in Box 12 with code V.
Form 1099-B (Proceeds From Broker and Barter Exchange Transactions): Your brokerage firm (where your vested RSU shares are held and sold) will issue this. This form reports the details of your stock sale, including the proceeds from the "sell to cover" transaction and potentially any other RSU shares you sold.
Your RSU Vesting Statement(s) / Supplemental Information from your Broker: This is arguably the most critical document for accurate RSU tax reporting. It details the vesting dates, the fair market value of the shares on those dates, and the number of shares withheld for taxes. Many brokerage firms provide a "Supplemental Information" form alongside your 1099-B, which contains the correct cost basis information for your RSU sales. If you don't have this, contact your employer's stock plan administrator or your brokerage.
Prior Year's Tax Return (Optional but helpful): If you had RSU activity in previous years, having your prior return handy can provide context, though it's less critical for the current year's "sell to cover" transaction.
Got everything? Fantastic! You're already ahead of the curve.
Step 2: Entering Your W-2 Information
This step is generally straightforward, as TurboTax is designed to handle W-2 entries seamlessly.
2.1: Locating the W-2 Section
Open your TurboTax software or log in to your TurboTax Online account.
Navigate to the "Wages & Income" section. This is usually found in the "Federal" tab.
Look for "Wages and Salaries (W-2)" and select "Start" or "Revisit."
2.2: Inputting W-2 Details
You'll be prompted to enter information from your W-2. You can often import your W-2 directly from your employer if they participate in TurboTax's import program. This is the easiest and most accurate method.
If you're entering manually, carefully input all the information from your W-2 into the corresponding boxes in TurboTax.
Pay special attention to Box 1 (Wages, Tips, Other Compensation) and Box 12 (with code V). The income from your vested RSUs (including the shares sold for "sell to cover") should already be included in Box 1. This is your initial "cost basis" for those shares.
Why this is important: The IRS considers the fair market value of your RSUs on the vesting date as ordinary income, and your employer adds it to your W-2. This means you've already paid (or had withheld) income tax on that amount. When you sell those shares, you only owe capital gains tax on any additional appreciation in value from the vesting date to the sale date.
Step 3: Reporting Your Stock Sales from Form 1099-B
This is where the "sell to cover" specific details come into play and where many users encounter issues with double taxation. The key is to correctly adjust your cost basis.
3.1: Navigating to the Investment Income Section
From the "Wages & Income" section, scroll down to "Investment Income."
Find "Stocks, Cryptocurrency, Mutual Funds, Bonds, Other" and click "Start" or "Revisit."
TurboTax will ask if you sold any investments in the tax year. Select "Yes."
Choose "Stocks, Bonds, Mutual Funds" as the investment type.
3.2: Entering Your 1099-B Information
TurboTax will ask you to identify your brokerage firm. You might be able to import your 1099-B directly from many major brokerages. This is highly recommended to avoid manual entry errors.
If importing isn't an option, select "Enter a different way" or "Type it in myself."
You'll be guided to enter the details from your Form 1099-B. For "sell to cover" transactions, look for lines on your 1099-B that correspond to the sale of your company stock.
Crucial Note: On your 1099-B, the "cost basis" (Box 1e) for your "sell to cover" shares might be reported as $0, "UNKNOWN," or a very low amount. This is often incorrect for RSU "sell to cover" transactions because your employer already reported the value of these shares as income on your W-2. If you use the $0 or low cost basis from the 1099-B, TurboTax will calculate a large capital gain, effectively double-taxing you on the RSU income.
3.3: Addressing the Cost Basis Discrepancy
This is the most important step to avoid double taxation.
When you enter the sale from your 1099-B, TurboTax will likely ask you questions about the cost basis.
If Box 1e on your 1099-B for the RSU "sell to cover" transaction is incorrect (i.e., $0 or too low), check the box that says "The cost basis is incorrect or missing on my 1099-B."
TurboTax will then prompt you to enter the correct cost basis. This is where your RSU Vesting Statement or Supplemental Information from your broker becomes invaluable.
Your correct cost basis for the "sell to cover" shares is the fair market value of those shares on the date they vested. This is the amount that was already included in your W-2.
Example: If 10 shares vested and were sold to cover taxes at $50 per share, your proceeds are $500. Your cost basis for these 10 shares is also $500 (10 shares * $50/share). When you enter proceeds of $500 and a cost basis of $500, your capital gain will be $0, which is typically correct for "sell to cover" shares, as you're just covering the tax liability on income already reported.
TurboTax might also ask if this was a sale of employee stock. Select "Yes" and then choose "Restricted Stock Units (RSUs)." This helps TurboTax guide you through the correct adjustments.
You may need to enter the date acquired. This is the vesting date of your RSUs, not the original grant date.
For the "Date Sold," use the actual sale date from your 1099-B.
Since "sell to cover" transactions typically occur immediately upon vesting, the holding period is very short (often less than a year). Therefore, any minor gain or loss will generally be considered a short-term capital gain or loss.
3.4: Handling Multiple RSU Sales (if applicable)
If you sold other RSU shares in addition to the "sell to cover" portion, you'll need to report each of those sales separately on your 1099-B. For these sales:
The cost basis is still the fair market value on the vesting date of those specific shares.
The date acquired is still the vesting date.
The date sold is the actual sale date.
Your capital gain or loss will be the difference between the sale price and that vesting date fair market value.
The holding period (short-term vs. long-term) will depend on how long you held the shares after vesting and before selling. If you held them for more than one year from the vesting date, any gain would be a long-term capital gain, taxed at more favorable rates.
Step 4: Reviewing Your Tax Forms and Summary
Once you've entered all your RSU-related information, it's crucial to review the generated tax forms and your overall tax summary.
4.1: Checking Form 8949 and Schedule D
TurboTax will generate Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D, Capital Gains and Losses.
On Form 8949, your RSU "sell to cover" transaction should appear with your adjusted cost basis. Look for an adjustment code, often "B" (for basis not reported to the IRS) or "E" (for basis incorrect).
The net gain or loss for your "sell to cover" transaction should ideally be zero or very close to zero. If you see a large capital gain here for your "sell to cover" shares, it means your cost basis wasn't correctly adjusted, and you'll be double-taxed. Go back and re-check Step 3.3.
Schedule D will summarize your total capital gains and losses.
4.2: Verifying Your W-2 and 1099-B Consistency
Ensure that the RSU income shown on your W-2 is correctly reflected in your overall income, and that the "sell to cover" transaction on your 1099-B correctly results in little to no capital gain.
Important Tip: If you're unsure, or if your tax liability seems unexpectedly high after entering your RSU information, it's always a good idea to consult a tax professional. RSUs can be tricky, and a small error can lead to a significant difference in your tax outcome.
Frequently Asked Questions (FAQs) - RSU and Taxes
Here are 10 common "How to" questions related to reporting RSU "sell to cover" on taxes with quick answers:
How to find the correct cost basis for RSUs sold to cover taxes?
Your correct cost basis is the fair market value of the shares on the vesting date. Look for this on your RSU vesting statement or supplemental information from your brokerage, as it's the amount already included in your W-2 income.
How to avoid double taxation on RSU "sell to cover" transactions?
When entering your 1099-B, always adjust the cost basis for "sell to cover" shares to equal the fair market value on the vesting date (the amount included in your W-2). This results in a zero or near-zero capital gain/loss.
How to determine if RSU gains are short-term or long-term capital gains?
The holding period for capital gains on RSUs begins on the vesting date. If you sell the shares one year or less after vesting, it's a short-term gain. If you sell them more than one year after vesting, it's a long-term gain.
How to handle RSU dividend equivalents in TurboTax?
If your RSUs paid dividend equivalents before vesting, these are typically treated as ordinary income and should be included on your W-2. If they were paid after vesting, they would be reported on Form 1099-DIV.
How to report RSUs if I didn't sell any shares beyond "sell to cover"?
You still need to report the income from vesting on your W-2. For the "sell to cover" transaction, report it on your 1099-B with an adjusted cost basis so the capital gain is zero.
How to find my RSU vesting date for tax purposes?
Your RSU vesting date will be clearly stated on your RSU vesting statement or grant agreement provided by your employer or brokerage.
How to get a supplemental statement for RSU cost basis if my broker didn't provide one?
Contact your employer's stock plan administrator or your brokerage's customer service. They should be able to provide the necessary historical vesting and fair market value data.
How to enter multiple RSU vesting/sale events in TurboTax?
Each vesting and subsequent sale of a specific RSU lot should be entered as a separate transaction in TurboTax, using the correct vesting date as the acquisition date and the fair market value on that date as the cost basis for each lot.
How to tell if my RSU income is already on my W-2?
Check Box 1 (Wages, Tips, Other Compensation) on your W-2. RSU income from vesting is almost always included here. Also, look for Box 12 with code V, which specifically identifies income from non-statutory stock options (which RSUs are often treated as for reporting purposes).
How to get help with complex RSU tax situations in TurboTax?
If your situation is complex or you're unsure about any aspect, TurboTax offers options for live tax expert help, or you can consider consulting a qualified tax professional outside of TurboTax.