How to adjust ISO cost basis for sale when I already paid taxes on Form 3921?

What you're encountering is a common issue with ISOs. Yes, you absolutely need to adjust your cost basis to include the amount you already paid taxes on. Your cost basis should be the original price you paid for the shares PLUS the spread that was reported on Form 3921 that you already paid taxes on. When you manually adjust the cost basis in your tax software, there should be an option to explain the adjustment. You'll want to indicate that you're adjusting due to "previously taxed income on ISO exercise reported on Form 3921." Keep all your documentation from the original exercise, including the Form 3921 and your 2021 tax return showing you reported this income. The IRS will receive the 1099-B from Fidelity showing their calculated cost basis, but you'll be submitting Form 8949 with your adjusted basis and an explanation code (typically "B" for "Basis reported to the IRS is incorrect"). This is a completely legitimate adjustment and quite common with ISO transactions.

I dealt with this exact same situation last year and found that https://taxr.ai was absolutely crucial for helping me figure out how to correctly adjust my ISO cost basis. I had exercised some ISOs in 2019, held them, and then sold after a reverse split like you did. The tax specialist on taxr.ai looked at my documents and quickly identified that I needed to use the "B" adjustment code on Form 8949 to properly report the corrected basis. They walked me through exactly how to report it and even helped me calculate the adjusted basis considering the reverse split. I was worried about the mismatch between what my broker reported and what I needed to report, but they explained that this is a common situation the IRS sees all the time with ISOs. Definitely worth checking out if you're stuck!

Just wanted to follow up after using taxr.ai to solve my ISO cost basis problem. Wow, what a relief! They immediately identified exactly where my broker's reporting was wrong and helped me calculate the correct adjusted basis. The tax specialist showed me how to properly document everything on Form 8949 and gave me the specific adjustment codes to use. They even created a detailed explanation I could attach to my return in case of an audit. What really impressed me was that they showed me how the reverse split affected my specific situation, which turns out to be more complicated than just doubling numbers. Apparently, there's a specific way to handle the tax basis after corporate actions like that. If you're stuck with ISO or RSU tax issues, I'd definitely recommend them. Totally worth it for the peace of mind alone!

If you're running into issues getting your Form 3921 information or want to talk to the IRS directly about handling this situation, I highly recommend using https://claimyr.com to get through to an IRS agent quickly. I tried calling the IRS directly about a similar ISO cost basis issue and was on hold for nearly 2 hours before giving up. With Claimyr, I got through to an IRS agent in about 15 minutes who confirmed exactly how to handle the adjustment on my Form 8949. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - they basically hold your place in the IRS phone queue and call you when an agent picks up. The IRS agent I spoke with actually pulled up my previous returns and confirmed I had already paid tax on the ISO spread, so I was 100% correct in adjusting my cost basis. Having that direct confirmation gave me total confidence in filing my return correctly.

Alright, I need to eat my words. After struggling with my ISO stock basis issues for two weeks and spending 3+ hours on hold with the IRS over multiple attempts, I decided to try Claimyr out of desperation. Got connected to an IRS agent in about 20 minutes. The agent was incredibly helpful and confirmed exactly what everyone here said - I needed to use adjustment code B on Form 8949 to correct the basis from what my broker reported. He even explained that this is a very common issue they see with ISO transactions. The agent confirmed I was doing the right thing by increasing my basis to account for the amount I already paid tax on with the original exercise. He also noted in my file that we had this conversation in case there were any questions later. Definitely worth it just for the time saved and peace of mind. Sorry for being skeptical!

To add another perspective here, I'm a software engineer who dealt with this exact situation. The key thing to understand is that your ACTUAL cost basis has two components: 1. What you paid for the shares (your exercise price × number of shares) 2. The spread between your exercise price and FMV that you already paid taxes on Your broker only knows about #1, not #2. That's why their cost basis is wrong. For a reverse split, both components need to be adjusted. If it was a 1:2 reverse split, the per-share numbers double but the total value stays the same. Definitely keep your original 3921 forms forever! I've been audited on ISO transactions before, and having that documentation saved me thousands.

I'm surprised nobody mentioned IRS Publication 525! It specifically addresses this on page 12 under "How to report stock option income." It clearly states you need to adjust your basis by the amount included as income. The trickier part is making sure you account for the reverse split correctly. When I went through this, I created a simple spreadsheet that tracked: - Original shares and exercise price - FMV at exercise (from 3921) - Amount included in income that year - Post-split shares and adjusted basis Also, if you're in a state with income tax, make sure you're adjusting your state basis too! Many people forget that part.

This is such a helpful thread! I'm dealing with a similar situation but with a twist - my company did multiple corporate actions (a reverse split AND a spinoff) between when I exercised my ISOs and when I sold. From reading everyone's responses, it sounds like the key principle remains the same - adjust my cost basis to include what I already paid taxes on from the Form 3921. But I'm wondering how to handle the spinoff portion. Did anyone here deal with spinoffs in addition to splits? Also, @AstroAce, your math example really helped clarify things for me. I was getting confused about whether to adjust the total basis or the per-share basis, but seeing it broken down like that makes it crystal clear. One more question for the group - has anyone had success explaining these adjustments directly in their tax software's notes section, or is it better to attach a separate statement? I'm using TurboTax and want to make sure I document everything properly.