You sold vested company shares last year, and your tax return now shows a capital gain much larger than any growth the stock actually had. In many cases, that isn't a real gain. It's RSU double taxation, caused by a cost basis that was never recorded correctly, and it means paying tax twice on the same income.

How are RSUs taxed in the first place?

RSUs are taxed as ordinary income on the day they vest. The market value of the shares at vesting is added to your wages, appears on your W-2, and is taxed the same way as salary.

That vest-date value also becomes your cost basis, which is the starting point for measuring any later gain or loss. When you sell, only the change in value after vesting counts as a capital gain or loss. The income portion has already been taxed.

Where does the double taxation actually come from?

It usually comes from the Form 1099-B your brokerage sends after you sell. For shares received as compensation, brokers often aren't required to report the full cost basis to the IRS. The form may show a basis of zero, leave it blank, or list a figure that excludes the income you already paid tax on.

If the return is filed using that number as it stands, the entire sale price is treated as profit. The vesting income is then taxed twice: once as wages on your W-2, and again as a capital gain on your 1099-B.

Why doesn't tax software catch it?

Tax software generally trusts what's on the form. It can't connect the shares on your 1099-B to the income on your W-2 unless you tell it to. Imported brokerage data carries the same gap, so an automatic import can repeat the error instead of fixing it.

The problem is especially easy to miss with sell-to-cover transactions, where shares are sold automatically at each vest to pay withholding. Each sale may be small, but across a year of regular vests, the overstated gains can add up.

How can you tell if it happened on your return?

The quickest check is to compare the cost basis on your 1099-B with the value of the shares on the date they vested. If the basis is zero, missing, or clearly lower than the vest-date value, the reported gain is likely overstated.

Other signs include a large gain on shares sold shortly after vesting, when little price movement would be expected, and gains reported on sell-to-cover sales. Many brokerages include a supplemental statement with the 1099-B that shows the adjusted basis. That document is often where the correct figure is.

How is the cost basis corrected?

The correction is made on Form 8949, where each sale is listed. The basis reported on the 1099-B stays as shown, and an adjustment is entered with code "B" to reflect the correct basis: the vest-date value already included in income.

Common sources for the correct basis include the brokerage's supplemental statement, vesting records from your equity plan account, and pay stubs showing the income recognized at each vest. Keeping these records together through the year makes the adjustment much easier at filing time.

What if the mistake happened on a past return?

A past return can generally be amended with Form 1040-X. The IRS typically allows a refund claim within three years of the original filing date, or two years from when the tax was paid, whichever is later.

One consideration is whether the overstated gain is large enough to justify the time and cost of amending. Another is that several years may be affected if shares were sold over multiple tax years. Reviewing each year's 1099-B and supplemental statements side by side shows the full scope before any decision is made.

Is this the only way RSUs create tax surprises?

No. A separate, common issue is under-withholding. Employers typically withhold on RSU income at a flat supplemental rate, which can be lower than the rate that actually applies to higher earners. The result can be a balance due at filing time. It's a different problem from double taxation, but it's often discovered at the same moment.

Common approaches include making estimated tax payments in vesting years, adjusting W-4 withholding, or setting aside cash or shares to cover the gap. Each option carries trade-offs in cash flow and flexibility.

Frequently Asked Questions

Why does my 1099-B show a zero cost basis for my RSUs?

Because brokers generally aren't required to report the compensation portion of basis for shares from employer equity plans. The zero or missing figure reflects a reporting rule, not your actual basis.

Do I pay tax on RSUs when they vest or when I sell them?

Both, but on different amounts. The vest-date value is taxed as ordinary income at vesting. At sale, only the change in value since vesting is taxed as a capital gain or loss.

If I sold my RSUs right after they vested, do I owe capital gains tax?

Usually little or none. Shares sold soon after vesting tend to sell close to their vest-date value, so the gain or loss is small. A large reported gain on a quick sale is a common sign the basis wasn't adjusted.

Can I fix double-taxed RSUs from previous years?

Generally, yes. An amended return (Form 1040-X) filed within the IRS time limits, with corrected basis figures on Form 8949, can recover the overpaid tax.

Does this double taxation also happen with ESPP shares?

A similar issue can arise. Part of an ESPP discount is often reported as income, and the 1099-B basis may not reflect it. The correction follows the same logic, though the income calculation depends on how long the shares were held.

If your return shows large gains tied to vested shares, or you're unsure how your basis was reported, a free 30-minute call with Elena Hawk, CFP®, is a simple way to review your statements and see where things stand.

This article is for educational purposes only and does not constitute personalized financial, tax, or legal advice. Please consult a qualified professional for guidance specific to your situation.