Taxed Twice: The RSU Mistake That's Probably on Your Last Tax Return

There's a real chance you overpaid your taxes last year. Maybe by a few thousand dollars. Maybe by a lot more.

And the unsettling part is that your return looks completely correct. The numbers match the forms. Your tax software didn't flag anything. Your CPA signed it. The IRS accepted it without a peep.

None of that means it was right — because when it comes to restricted stock units, the official form your whole return is built on is frequently wrong on purpose.

If you've sold vested RSU shares in the last few years, this is worth ten minutes of your attention. The good news, and it's rare for a tax mistake: if it happened to you, you can usually still get the money back.

The two-event rule that everyone blurs together

Start with how RSUs are supposed to work, because the mistake lives in the gap between two separate tax moments.

Event one: vesting. When your RSUs vest, the shares become yours, and the IRS treats their full value that day as ordinary income — exactly like salary. It lands on your W-2, and you pay income tax on it right then, usually through shares withheld automatically. If $100,000 of stock vests, you've been taxed on $100,000 of wages. Done. ‍

That vest-date value is the key number, because it becomes your cost basis — the amount you're treated as having "paid" for the shares. You need this in a moment.

Event two: selling. Later, you sell the shares. Now they're just stock you own, and you owe tax only on the change in value since vesting. If you sold the moment they vested, your gain is roughly zero — you already paid tax on that value as wages. If the stock rose $10 before you sold, you owe capital gains tax on $10 a share. Not on the whole thing. On the $10.

Two events, two different taxes, and — done correctly — no double-counting. The value gets taxed once as wages, and only the growth after that gets taxed as a gain.

The trap is that the paperwork quietly breaks this.

Why your 1099-B is wrong by design

When you sell shares, your broker sends you (and the IRS) a Form 1099-B — the tax form that reports what you sold, for how much, and what your cost basis was. Your tax software imports it. Your return is built on it.

Here's the problem. The IRS prohibits brokers from including the compensation income — the value already taxed on your W-2 — in the cost basis they report for equity-comp shares. So the broker reports the only number it's allowed to: what you paid out of pocket. For RSUs, you paid nothing. So the 1099-B routinely shows a cost basis of $0.

Think about what that does. You sell $100,000 of vested shares. Your true basis is $100,000 (you were already taxed on it). But the 1099-B says your basis was $0 — which means the form is telling the IRS you had a $100,000 capital gain.

Copy that form into your return without correcting it, and you pay capital gains tax on the entire $100,000 — money you already paid income tax on when it vested. That's the double tax. Same dollars, taxed twice.

A quick, clean example: 100 shares vest at $50. That's $5,000 of income on your W-2 — taxed. You sell later at $55, for $5,500. Your real, correct gain is $500. But if the 1099-B shows a $0 basis and you don't fix it, you'll report a $5,500 gain and pay tax on an extra $5,000 you already paid tax on. Now scale that from 100 shares to a real executive RSU package, and "an extra $5,000" becomes an extra $50,000 or more of phantom gain.

Why almost nobody catches it

This is the part that makes it dangerous. The error doesn't look like an error.

Your return matches the 1099-B the IRS has on file — so nothing gets flagged. Tax software imports the broker's numbers and, unless you go out of your way to override them, uses the wrong basis without complaint. And plenty of CPAs miss it too, because the correct number isn't on the 1099-B at all — it's on a separate "supplemental" statement in your equity portal that nobody hands them.

So everything feels finished. It matches the official form. But "matches the form" and "is correct" are two different things, and with equity comp they routinely aren't the same thing. This is the whole rules-over-feelings idea in miniature: the sense that a return is done because it ties to an official document is a feeling, not a check. The rule is that RSU basis on a 1099-B is wrong until proven otherwise.

How it's supposed to be fixed

You don't cross out the broker's number and pretend it said something else. The IRS wants the reconciliation shown.

On Form 8949 — the form where you list individual security sales — you report the proceeds exactly as the 1099-B shows them, then make a documented basis adjustment using code B ("basis is incorrect") and enter the correction. Your correct basis is the fair market value on your vesting date, which you'll find on the supplemental statement from your equity platform (Fidelity, Schwab, Morgan Stanley, E*TRADE, Carta — they all keep it, separately from the regular 1099-B). Done right, your return still matches the form the IRS received, but only your true gain gets taxed.

And it isn't just RSUs. The same trap catches other equity comp: non-qualified stock options (your basis should include the spread already taxed on your W-2) and ESPP shares (which have an ordinary-income component reported on Form 3922). Incentive stock options have their own basis rules depending on how you sold. The common thread: any compensation already taxed as income belongs in your basis, and the broker isn't allowed to put it there for you.

The rare tax mistake you can actually undo

Here's why this is worth chasing down rather than just filing away as a regret. If you overpaid on a past return, you can generally amend it — file a corrected return (Form 1040-X) — for up to three years back, and the IRS refunds the difference. Most tax mistakes cost you and stay costing you. This one is reversible. People recover five figures doing exactly this.

So it's worth pulling your last couple of years of returns and asking one specific question: for every RSU or equity-comp sale, was the cost basis adjusted to the vest-date value, or did it quietly come across as $0? If it was $0 and nobody fixed it, you have money sitting with the IRS that belongs to you.

Rules over feelings, even in the boring paperwork: a return that matches the form can still be wrong, and with equity comp, the form is built to be wrong. The only protection is knowing to check.

Equity comp is where small paperwork details turn into five-figure numbers. Our Exec Comp Optimizer helps you make the forward-looking decisions — when to sell, what it costs, how to plan around the tax — and if you've had significant RSU or option sales in the last few years, it's worth having those returns reviewed for exactly this error before the three-year window closes.

This article is for educational purposes only and is not tax or legal advice. Equity compensation and cost-basis rules are technical and fact-specific. Before amending a return or acting on any of this, review your specific documents with your CPA or tax advisor — and with our team.