Direct answer
Settlement-linked stock sales hit the 1099-B audit trail: basis, sale dates, fee lines, and the settlement's wage/non-wage split. The file is read in the payment year, not in the settlement year. The settlement tax stack is in the settlement guide , the state lines in the state guide , and the comp records in the records guide . The SGA interaction is in the SGA guide .
Updated November 9, 2026 · Reviewed against IRS — tax guidance
Settlement-linked stock sales hit the 1099-B audit trail: basis, sale dates, fee lines, and the settlement's wage/non-wage split. The file is read in the payment year, not in the settlement year.
The Audit Lines
- Basis & 1099-B: RSU sales follow vesting basis; option sales follow exercise basis. The 1099-B form matches the IRS trail (see the 409A guide and the exercise guide).
- Sale windows: trading windows survive separation, 10b5-1 plans bind post-exit, and insider rules follow SEC lines (sec.gov).
- Fee trails: attorney fees on settlement sales change the net, and the fee lines are in the fee rules guide.
The settlement tax stack is in the settlement guide, the state lines in the state guide, and the comp records in the records guide. The SGA interaction is in the SGA guide.
Put the rule into action
Write the letter with the free Severance Package Negotiation Letter generator. The state pages carry the local payout and notice windows, and the application tracker keeps the follow-up date in writing.
A settlement that leaves you holding or selling shares creates a brokerage reporting trail that the IRS reads in the year of sale, not the year of the agreement. Build the reconciliation before filing.
- RSU shares: basis is normally the amount reported as income at vest, plus any related amounts, so sales must match the vest records.
- Option shares: basis depends on the exercise price and whether any spread was reported as wages or entered alternative minimum tax.
- Shares acquired in a transaction: replacement basis rules can apply, which changes the reported gain.
- Sale dates: a sale inside a trading window still reports, and post-exit insider rules continue to apply.
Collect the vest statements, the exercise records, the Form 1099-B, and the settlement agreement in one folder, and read the equity vesting definition to match award type to tax event. Work the reconciliation inside the equity and tax section.
Reconcile Basis Before You File
Mismatched basis is the most common audit line on an employment settlement involving stock. Reconcile it line by line, and correct the broker record rather than adjusting on the return.
- List each sale: acquisition date, award type, quantity, sale price, and the broker-reported basis.
- Match each basis to the employer record: vest income statement or exercise record.
- Flag any sale reported as basis not reported to the IRS, which is the line that needs correction.
- Ask the broker to correct reported basis where records support it, and keep the request.
- Ask the former employer or its stock administrator for the missing statements in writing.
Get those records before you lose portal access; the vesting calculator helps you sanity-check tranche counts and dates. Note the settlement allocation too: wage lines report on a W-2 while non-wage lines may arrive on another form, and mixing the two is a frequent filing error. The Form W-2 definition shows which boxes carry wages.
Attorney Fees And The Net Line
A settlement reported gross and paid net creates a mismatch between what the forms show and what reached your account. Document the split.
- Get the closing statement showing gross, fees, and net, with dates.
- Ask how the fee was handled: paid by you, deducted before payment, or reported separately.
- Ask for the allocation of the settlement between wage and non-wage amounts in writing.
- Confirm which year the fee and the payment each fall into when a settlement spans December and January.
Fee treatment for employment settlements changed for tax years after 2017 and depends on the claim type and how the fee is paid, so confirm the reporting treatment with a tax professional rather than assuming a deduction. Where the agreement is silent, ask the payer for the allocation before you file; a written allocation clause is cheaper than an amended return.
| Sale Type | Basis Source | Document To Keep |
|---|
| RSU shares sold after vest | Amount reported as income at vest | Vest statement and 1099-B |
|---|
| ISO shares exercised | Exercise price plus AMT-related items | Exercise record and Form 3921 |
|---|
| NSO shares exercised | Exercise price plus wage amount reported | W-2 line and broker statement |
|---|
| Shares converted in a merger | Replacement basis from the transaction | Conversion statement |
|---|
| Broker basis not reported | Your own acquisition records | Written correction request to the broker |
|---|
For the current text behind these numbers, start with the New York Severance Offset rule page and the New Jersey Severance Offset rule page, along with the Severance Pay definition. Those sources state the rule in full; this page only points at them.
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Frequently Asked Questions
- Why does my 1099-B show the wrong basis?
- Broker systems often lack employer records for stock compensation, so they report zero or partial basis. Send the vest or exercise statements and ask for a correction; fixing the broker record beats adjusting the return later.
- Does a settlement payment appear on Form 1099-B?
- No. The 1099-B reports securities sales. Cash settlement amounts appear on a W-2 for wage lines or on another information statement for other amounts, which is why the written allocation matters before signing.
- Can I sell settlement shares right away?
- Only inside the rules that still bind you. Trading windows and insider restrictions can survive separation, and a planned sale can collide with a blackout. Ask the stock administrator for the post-exit window before you decide.
- How do attorney fees change my reported income?
- It depends on whether the fee is deducted before payment or paid by you, and on the claim type. Get the closing statement and the allocation in writing, then confirm the reporting treatment with a tax professional before filing.
The allocation between wage lines and non-wage lines decides the reporting form, and the basis trail on the 1099-B side is an IRS rule, not a state rule. Ask for the allocation sentence in the settlement, keep the fee invoice and the closing statement, and confirm the wage-claim deadline and the severance offset treatment with the state agency named on the state rule pages before you sign. The severance weeks and the benefits months are counted in the severance calculator.
Sources (official record — verify before filing)
IRS — tax guidance