Equity compensation reporting requires precise coordination across payroll, brokerage, and tax systems.
Updated for filing season as April 15th, 2026, approaches
Tax season has a way of exposing uncomfortable truths. One of them is this: equity compensation does not behave like normal income, yet it is often reported as if it does. The result is confusion, overpayment, IRS notices, and a lingering sense that something went wrong even when the return was "filed correctly."
For employees, executives, founders, and early-stage company veterans who earned income from stock compensation or company shares in 2025, this filing season demands extra care. Reporting rules are fragmented across forms, timing mismatches are common, and the IRS has become far more aggressive in matching payroll data to brokerage reporting.
This article walks through what actually matters for Tax Season 2026. Not the surface-level explanations, but the mechanics, the traps, and the planning implications that show up when stock compensation meets a real tax return.
Equity compensation is not taxed once. It is taxed in stages, under different systems, often years apart.
Payroll reports income when compensation vests or options are exercised. Brokerages report proceeds when shares are sold. The IRS receives both streams of information independently, then attempts to reconcile them. What the IRS does not receive is your full tax basis story, your AMT adjustments, or the economic reality of how those shares were acquired.
That burden falls on you.
Filing errors are no longer rare. They are routine.
If your tax return includes equity compensation, your story is told across multiple forms. Each one captures a fragment, never the whole picture.
Most reporting mistakes originate on Form 8949 and quietly cascade from there.
Restricted Stock Units remain the most common form of equity compensation and the most commonly misreported.
So far, straightforward.
The problem emerges at the sale. Brokerage Form 1099-B often reports proceeds correctly but understates or omits cost basis. If you fail to adjust the cost basis on Form 8949, you may pay tax twice on the same income: once as wages and again as capital gain. IRS instructions for Form 8949
Even in 2026, this remains one of the most frequent causes of IRS CP2000 notices.
"Covered security" status does not guarantee correct basis reporting. It only guarantees that something was reported.
NSOs generate ordinary income at exercise equal to the spread between the exercise price and fair market value.
Timing mismatches are common. Many taxpayers exercise in one year and sell in another, creating reporting gaps that require careful reconciliation.
ISOs remain the most misunderstood equity instrument in the tax code.
At exercise:
At sale:
Meanwhile, AMT basis and regular tax basis diverge and must be reconciled. Form 6251 errors are widespread, particularly when AMT credits are involved.
In volatile markets, AMT exposure has increased, not decreased. Many taxpayers now hold AMT credits they do not realize they can recover.
Employee Stock Purchase Plans appear simple but conceal complex tax treatment.
Brokerages almost never calculate ESPP tax correctly. Form 3922 is informational, not authoritative. Taxpayers must reconstruct the transaction manually.
Small errors here rarely trigger immediate notices. Instead, they quietly accumulate across years.
Not all equity arrives via a trading platform.
This category includes:
Common 2026 issues include missing basis records, forgotten elections, and unsupported QSBS eligibility assumptions.
April is the worst month to discover that your equity history lives in old email threads.
Multi-state equity income sourcing remains one of the fastest-growing areas of tax controversy.
The IRS may be the referee, but states are increasingly aggressive participants.
Patterns emerging this filing season include:
CP2000 notices are not audits, but they are not harmless. Most stem from preventable reconciliation failures.
A disciplined approach matters more than speed.
Compliance looks backward. Planning looks forward. Tax season punishes those who confuse the two.
Stock compensation is not just income. It is a system spanning payroll, brokerage reporting, tax law, and long-term wealth planning.
Most professionals see only part of it. At VIP Wealth Advisors, equity compensation is treated as a lifecycle decision rather than a line item.
When no one owns the whole map, the system breaks. When it is integrated properly, stock compensation becomes what it was meant to be: a wealth-building tool, not a recurring tax surprise.
RSUs are taxed as ordinary income when they vest. The value at vesting is included on Form W-2. Any subsequent sale creates a capital gain or loss that must be reported separately.
Brokerages often exclude the income already reported on your W-2 from the cost basis. Taxpayers must adjust the basis on Form 8949 to avoid double taxation.
You do not owe regular tax on exercise, but you may owe Alternative Minimum Tax. The spread at exercise, called bargain element, is included in AMT income and reported on Form 6251.
Failing to track separate AMT and regular tax bases. This leads to incorrect gain calculations and missed AMT credits.
Part of the discount is taxed as ordinary income at the time of sale. The remaining gain may qualify for capital gain treatment, depending on the holding period.
Yes. RSU vesting and option exercises can create taxable income even if no shares are sold.
Equity income may need to be allocated across states based on where services were performed during vesting periods.
Yes. Most CP2000 notices related to equity compensation arise from basis mismatches and timing errors, not intentional misreporting.
If stock compensation plays a meaningful role in your income or net worth, tax filing should not be reactive. It should be integrated with planning.