> the broker should have known that and not 1099'd me for it.
The broker is obligated to 1099 you for it. The issue is that brokers who handle NSOs are not obligated to set the correct cost basis, so they set it to 0, making it seem like you owe tax on the entire NSO's value for cap gain, on top of the income recognized on the W2. Setting the correct cost basis after importing the 1099 is a tricky, manual, error-prone process, and companies that grant NSOs often don't warn you about it, either. Brokers should be required to set it (they seem to already know this information from your employer in most cases, but don't want to take responsibility for reporting that value to the IRS).
I'm sure you're right that the broker is obliged to 1099 me for it.
Are you saying that I should have imported the 1099 and overridden the basis of those shares to be exactly what the sale price was? That seems like an odd thing to expect the end user of tax software to know to do. It's not clear to me that doing that would not also set off a flag when the IRS evaluates the return. There ought to be some solution between employers, brokers and the IRS that doesn't put such a burden on the taxpayer.
> Are you saying that I should have imported the 1099 and overridden the basis of those shares to be exactly what the sale price was?
Yeah, you never leave income forms out, you always provide them and correct them if needed. My broker provides a separate, non-standard form with the cost basis for each transaction. Yours may or may not. Once you have the correct cost basis, you provide it on Form 8949 (column E plus code 'B' in column F), which then gets accumulated into Schedule D to provide the true gain/loss for the transactions.
> That seems like an odd thing to expect the end user of tax software to know to do.
Yeah. It's one of those things where I think doing your own taxes is an advantage over using the software. The problem becomes obvious when you understand how income tax works: tax applies to income --> the shares are part of my income, so were taxed as such --> but if cost basis is 0 then the entire sale price will also be considered income --> I'm being taxed twice?? Something is wrong here. The tricky bit is figuring out how to solve it :) But the IRS's instructions are quite thorough, and some googling can point you to the right instructions if it's not obvious where to start.
Correct and I agree. TurboTax flags zero cost basis values for you and gives you some basic instructions on where to look for the correct ones, but it's quite tricky. I think the issue is brokers don't want to take responsibility for setting the value.
The broker is obligated to 1099 you for it. The issue is that brokers who handle NSOs are not obligated to set the correct cost basis, so they set it to 0, making it seem like you owe tax on the entire NSO's value for cap gain, on top of the income recognized on the W2. Setting the correct cost basis after importing the 1099 is a tricky, manual, error-prone process, and companies that grant NSOs often don't warn you about it, either. Brokers should be required to set it (they seem to already know this information from your employer in most cases, but don't want to take responsibility for reporting that value to the IRS).