Handle liquidation distribution & RSU proceeds

[bombay_sapphire]

Background:

I worked for a tech company in 2019. It was later dissolved and all the RSUs were converted into equivalent cash distribution (priced at that time) and given out to all the RSU holders. In my case, I tried to sell all the stocks before the deadline.

I was able to sell it however, at a (lower) price ~$19.5 (hence 1099-B). Actual stock price at that time was ~$70. Later I received the cash distribution per share ~$51.5 (hence 1099-DIV, Box 9). To summarize, my RSUs were partially sold (priced at $19.5) and partially distributed in cash (priced at $51.5).

How can I report above event? Below is my understanding. Can someone please correct if I am wrong.

The way I'll be reporting this will be for every sell (or line) in my 1099-B, I'll have to subtract the amount which I've already paid taxes on at the time of vesting.

E.g. (form simplicity rounded off some numbers).

Let's say I was awarded 120 shares trading at $30 (when vested). 20 shares were traded for taxes. After taxes I received 100 shares, worth of $3000.

Now last year, one share was sold for $19.5, and cash liquidation of $51.5.

Per share profit at distribution time is: 19.5 + 51.5 = $71.

And so I received net = 100 * $71 = $7100.

Capital gains for these 100 shares:

= 100 * (share prices at proceeds - share price on which I already paid taxes for)

= 100 * (71 - 30) = 4100.

This could also be computed in terms of dollar amounts by subtracting dollar amount after taxes at the time of vesting ($3000) from net proceeds ($7100).

So basically my TT would look like below for a line in 1099-B:

Total shares = 100

Proceeds = $7100

Cost basis = $0

Adjusted cost basis = $3000

Capital gain = $4100

@ThomasM125Above question is in response to this question I'd earlier posted. However, that question doesn't provide the full picture.

[RobertG]

RSUs are taxed when they vest. Income is reported on the W-2 and shares are withheld to cover tax on the shares. Nothing else is reported on the tax return until the shares are sold.

A 1099-B is issued when the shares are sold. The basis of the shares is the market rate of the shares at the time of vesting that was reported as income on the W-2. When the sale is reported there will be a capital gain or loss. If sold the same day they vest, there will be a small capital loss due to the sales fee.

Here is how to report the sale of RSUs in TurboTax:

Enter 1099-B and select guide me step by step. You will need the grant information from your employer.

You need to know how many RSUs vested and how many were withheld for taxes in order to determine your basis.

You should be able to find the grant information on your 1099-B form or your consolidated statement. If you can’t find this info, contact your brokerage or your employer's stock plan administrator.

To report RSU sales in TurboTax:

1. When you enter you 1099-B information you will be asked: 'Do these sales include any employee stock? This includes ESPP, RSU, RS, NQSO, and ISO' Say yes.
2. Then you will be asked 'What type of investment did you sell?' Select 'Restricted stock units'
3. Check the box that says 'The cost basis is incorrect or missing on my 1099-B'
4. Then select 'I need help figuring out my cost basis'

You will then be prompted to enter the grant information.

[bombay_sapphire]

@RobertGThank you for commenting. I understood how to report the in the TurboTax. Basically, I've received 1099-B and 1099-DIV for the same set of RSUs.

However, I am confused how can I report the liquidation distribution from the 1099-DIV (as mentioned in my original question). When I input the 1099-DIV values in the TurboTax, it doesn't recognize the amount report on line line 9 (of 1099-DIV, liquidation distribution).

Does the calculation of computing adjusted cost basis seem correct (in my original question)?

[RobertG]

There's a tiny box that needs to be checked on the 1099-DIV screen. 

First, how to get there; then a little info below on why Box 8 and 9 is usually not taxable.

1.       With your tax return open, search for 1099-DIV or 1099DIV (lower-case works also) and then click or tap the "Jump to" link in your search results.

2.       Answer Yes to Did you receive any dividend income?

3.       Choose your bank or brokerage from the list to import your 1099-DIV and click/tap Continue or manually enter your 1099-DIV  by clicking/tapping I'll type it in myself.

4.       Follow the on screen instructions to enter your 1099-DIV.

Don't combine the amounts from 2 or more 1099-DIV forms if they're from the same payer. Instead, enter additional 1099-DIVs individually by answering Yes to Do you have any more dividend income from somewhere else which appears a few screens down the road.

If you are entering a second 1099-DIV, simply click/tap on Add Another Broker or Payer and follow the same steps above.

You may not need to report this income, however fill in the 1099-DIV as written on the form.

Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. These distributions are, at least in part, one form of a return of capital. They may be paid in one or more installments. You will receive Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9.

Any liquidating distribution you receive is not taxable to you until you have recovered the basis of your stock. After the basis of your stock has been reduced to zero, you must report the liquidating distribution as a capital gain. Whether you report the gain as a long-term or short-term capital gain depends on how long you have held the stock.

If it was a partial liquidation, there is nothing to report on your tax return. You adjust the cost basis of your stock or mutual fund by the amount of the partial liquidation shown in Box 8 or Box 9, then when you eventually sell the stock you will use the lowered cost basis as the purchase price of the stock.

If the liquidating distribution shown in Box 8 or 9 is a complete liquidation, then report the amount in Box 8 or 9 on the stock sale screen as a stock sale.

For example, if your cost basis in stock in a company is $1,000 and the company is totally liquidated, then if you receive a 1099-DIV with Box 8 showing $400 and you received nothing else from the liquidation, then you would report the stock as a sale on the stock sale screen and report $400 as the sales price and $1,000 as the cost basis in the stock that was completely liquidated.

See http://www.irs.gov/publications/p550/ch01.html#en_US_2014_publink100010095

This question was previously answered by MichaelDC

[EclatC]

@bombay_sapphire have you got this resolved yet? I'm in similar situation and wonder how you handled it in the end. My understanding would be

1. Your liquidation dist. $5150 ($51.5 * 100) recovered the cost basis $3000 ($30 * 100). Treat the difference $2150 as long-term capital gain (assuming you held the stock over 1 year since acquired). Will need to enter $2150 separately in TT as no 1099B for this.

2. Cost basis is reducing to $0 as it's recovered from liquidation.

3. Long-term capital gain from stock sell: $1950 (($19.5 -$0) * 100). This number shall be same as what your 1099B reported.

Note that the total capital gain is still the same $4100, but just different in ways how to report the cost basis and the gains from liquidation dist. Is that aligned what you used in the end?

I also posted similar question here