The 2023 tax-return season is not like others in latest reminiscence for workers who’ve fairness compensation, whether or not inventory choices, restricted inventory items, worker inventory buy plans, and/or and firm shares. The impression of the down and unstable markets of 2022 can complicate your tax return.

One other more and more frequent challenge for tax reporting entails interstate worker mobility and the allocation of your revenue between states. That challenge is on the rise as extra workers than ever work remotely in a unique state from their employer, whether or not in a single place or as “digital nomads” shifting from state to state.

In a latest myStockOptions.com webinar on tax returns that I moderated, three main monetary and tax advisors with experience on this space introduced concepts and suggestions for stopping pricey tax-return errors and dealing with numerous points associated to fairness comp and stock-sale reporting. This text summarizes among the key factors they made.

Down And Unstable Inventory Costs? Take into account Tax-Loss Harvesting…

Amid the down and unstable inventory markets of 2022, many workers with inventory comp have capital losses from promoting firm inventory whose worth fell after vesting, train, or buy. In your tax return, you’ll be able to apply your capital losses to offset your capital features, thus lowering your taxable capital features revenue. After that, you can even web as much as $3,000 (for joint filers) of capital losses in opposition to strange revenue (e.g. your wage, revenue from RSU vesting, revenue from NQSO train). Any usused capital losses are carried ahead. That is known as “tax-loss harvesting.”

Webinar panelist Stephanie Bucko, a CPA and the co-founder of Mana Monetary Life Design in Los Angeles, routinely makes use of this technique to assist scale back her shoppers’ taxable revenue on tax returns. “It positively impacts the technique. You possibly can lower out a ton of taxes in case you’re capable of offset features with losses.” She makes use of software program to seize her shoppers’ full monetary image and likewise talks by their historical past to establish any capital losses that could be out there to web in opposition to features.

“It’s doubtless for tax yr 2022 that shoppers may have capital losses on their tax return,” Stephanie concluded. She identified that promoting loss-makers might be helpful not solely to reap the loss but additionally to diversify out of a concentrated inventory place. “This presents a possibility for shoppers with concentrated positions to scale back threat with out struggling tax penalties. Our advice is to assessment Schedule D for these tax losses.”

Tax-loss harvesting can also be pursued by webinar panelist Daniel Zajac, a CFP, Enrolled Agent, and managing companion of Zajac Group (Exton, PA). He famous that the unstable and declining inventory costs of 2022 introduced alternatives to benefit from capital losses not solely to offset any capital features in 2022 but additionally to hold remaining losses ahead to future tax years.

“In a yr like final yr,” Daniel went on, “I believe that quite a lot of advisors had been speaking to shoppers about capturing some losses and carrying them ahead. For a lot of advisors that’s a part of the method at year-end, and it’s funneled by to the tax preparer to make sure it will get accounted for.”

…However Watch Out For Wash Gross sales

Bear in mind that there are limits on tax-loss harvesting for many who attempt to be too intelligent with it. If you happen to offered loss-generating inventory earlier than the top of 2022 for tax-loss harvesting after which repurchased the identical inventory in January to maintain your funding in it, you’ll run into the “wash sale” rule. That is triggered by a sale of inventory at a loss coupled with the repurchase of the identical inventory inside 30 calendar days earlier than or after the sale.

The outcome? Your capital loss is disallowed in your tax return for that yr, with the idea and holding interval added to the alternative shares that you simply buy.

Most consultants imagine that choice workout routines, RSU vestings, and ESPP purchases are “buys” of firm inventory for tax functions. You wish to be careful for month-to-month RSU vestings, as these will set off a wash sale you probably have additionally offered firm inventory at a loss inside 30 days earlier than or after.

Your brokerage agency will normally monitor and report wash gross sales by account. Nonetheless, it might not do that throughout totally different accounts that you simply (and your partner) have on the agency and at different brokers. Due to this fact, you and/or your tax-return preparer should contemplate buying and selling exercise in securities throughout all of the accounts you might have.

“The very first thing I attempt to do is to coach my shoppers to keep away from the difficulty,” chuckled webinar panelist Dan B. Hodgin, a CPA and the proprietor of Silicon Valley Tax Group (Campbell, CA). “However clearly that may’t all the time be achieved.”

How must you monitor all of this? First, he mentioned, you calculate the variety of shares offered in the course of the yr. “Generally it appears as if shoppers have wash gross sales all year long, however by the top of the yr they don’t. They’re all netted out. But when they do in truth have wash gross sales which are going to hold to a future yr, you actually simply must do a guide calculation. There’s actually no different approach.”

You report on Schedule D the wash-sale quantity, which can differ from the quantity on the Kind 1099-B you obtain from the dealer, Dan defined.

“In a future yr, when these shares are offered which have an adjusted foundation, you’re going to regulate in the other way. You wish to make certain you might have full backup for that. Within the yr if you report the wash sale, the IRS just isn’t going to hassle you or query you. They may simply see much less of a loss, and that’s the top of that. However within the yr when you might have a much bigger loss than the one on the 1099-B for that yr, since you are adjusting for these earlier wash gross sales which have now been cleared out, that’s when the IRS goes to have questions.”

Dan noticed that many taxpayers haven’t skilled the difficulty of wash gross sales amid the rising inventory markets of the previous 10 years or so. “However with down markets and 80,000 new IRS brokers, I’m going to be very cautious with wash gross sales,” he said. “I’m going to get a full stock of shares and monitor these wash gross sales and the idea outdoors the brokerage account. In the event that they’re not monitoring wash gross sales on RSUs or ESPPs, then it’s a must to. It’s the one approach.”

“What if wash-sale RSU shares had been offered in the identical calendar yr?” requested a webinar attendee. “If you happen to generate a wash sale in February or March after which promote all of the shares you might have by December, I’m not going to place it in,” replied Dan. “The 2 are simply going to scrub one another out. I’m going to report it provided that it has a web impact on the tax return on the finish of the yr.”

For extra particulars on wash gross sales, see my Forbes.com article 7 Wash Sale Details To Know Earlier than Promoting Inventory For Tax Loss Harvesting.

Distant Work And Digital Nomads: Points With Worker Mobility

Usually, every state you reside in determines what revenue is taxable and when. Many firms report revenue to and withhold taxes for under the state the place you reside when restricted inventory items (RSUs) vest or if you train nonqualified inventory choices (NQSOs).

Nonetheless, different states the place you lived in the course of the vesting interval could contact you later if its tax officers study of this inventory comp revenue. The state’s tax authorities could search a proration of your compensation revenue to your former residence, basing their tax on the a part of the vesting interval throughout which you carried out companies of their state.

The final rule for sourcing and allocating inventory comp revenue is the variety of days labored within the state divided by (for RSUs) the variety of days between the grant date and the vesting, or (for NQSOs) the variety of days between the grant date and both the vesting or train date, relying on the state guidelines.

Within the myStockOptions webinar, panelist Dan Hodgin gave some key steering for cellular workers. “Get a journey historical past for the present yr,” Dan advisable. “Set up a residency historical past all through the vesting schedule.”

That is essential, he defined, as a result of you’ll be able to’t essentially belief your Kind W-2 on revenue willpower. “Payroll division employees are usually not tax consultants,” he cautioned, “and the complexity of this challenge has grown exponentially since distant working grew to become extra available.”

State reporting of state-sourced wages on Kind W-2 can fluctuate, he added. “New York, for instance, requires state wages to equal federal wages. Generally the year-end paystub can present a extra correct state breakdown.”

After getting your information in place, examine your reality sample to your W-2, Dan suggested. “If the W-2 doesn’t match the actual fact sample, ask your organization to amend it. If you happen to can’t get the corporate to amend the W-2, alter the knowledge on the tax return. Be sure to can again up your allocation with a powerful reality sample.”

With that reality sample documented, you’ll be prepared for any discover from the “aggrieved” state. He additionally warned workers to “be cautious of low- or no-tax states versus high-tax states.”

Further Tax-Reporting Sources

The 100-minute webinar wherein these tax consultants spoke, Stopping Tax-Return Errors With Inventory Comp & Inventory Gross sales, is out there on demand. For steering on the tax-return reporting for inventory compensation and gross sales of firm shares, together with annotated diagrams of Kind W-2, Kind 8949, Schedule D, Kind 3921, and Kind 3922, see the myStockOptions Tax Middle.