Invisible Income & Double Taxation: The Hidden Math of RSU and ISO Filings
January 27, 2026
A specialist’s guide to navigating the 1099-B cost basis trap, the AMT surprise, and the missing math in your equity compensation package.
You’ve worked hard, your company’s stock has performed, and you’ve finally seen those RSUs vest or your ISOs exercised. But as you sit down to look at your tax return this year, something feels wrong. You might be seeing a tax bill that is $20,000, $50,000, or even $100,000 higher than you expected.
In my practice, I’ve found that equity compensation is the #1 reason high-earning entrepreneurs and tech professionals overpay the IRS. The system is poorly explained, and the forms you receive from your brokerage are often technically "correct" but practically misleading.
Here are the two biggest "traps" currently sitting in your tax file and how we fix them.
Trap #1: The RSU "Double Tax" (The 1099-B Trap)
Most people assume that because their brokerage (Schwab, Fidelity, E-TRADE) is a massive institution, their tax forms must be ready to plug directly into tax software. This is a dangerous assumption.
When your RSUs vest, your company treats that value as income. They include it on your W-2, and they usually withhold taxes (often at a flat 22% rate) by selling a portion of your shares. However, when you sell those remaining shares, your Form 1099-B often reports a "Cost Basis" of $0.
If you vest $100,000 of stock and sell it for $100,000, and your tax software sees a "Basis" of $0, it thinks you just made a $100,000 profit. It will then try to charge you capital gains tax on money you already paid income tax on via your W-2.
We use Form 8949 to manually "step up" your basis. We look at your supplemental grant realizations to find the actual fair market value on the day you vested and ensure the IRS knows you’ve already paid your dues.
Trap #2: The ISO "Phantom Income" (The AMT Surprise)
If you hold Incentive Stock Options (ISOs), you likely know they are the "Golden Child" of equity because you don't owe regular income tax when you exercise them. You only pay when you sell. However, there is a hidden parallel universe called the Alternative Minimum Tax (AMT).
When you exercise ISOs and hold the shares, the IRS looks at the "spread", the difference between your low strike price and the market value. For AMT purposes, that spread is considered income, even though you haven't received a single dollar of cash.
You could owe a massive tax bill in April for "wealth" that only exists on paper. If the stock price drops after you exercise but before you sell, you might find yourself owing tax on money that has technically vanished.
The good news? AMT isn't always a permanent loss. It’s more like a prepayment. When you pay AMT, you create an AMT Credit that carries forward to future years. My job is to ensure we track that credit meticulously so you can "claw it back" the moment your tax situation allows.
The Bottom Line: Don’t DIY Your Equity
The IRS matching algorithms are faster than ever, and "standard" tax software is notorious for missing the cost-basis adjustments and AMT credit carry forwards that save my clients tens of thousands of dollars.
Are you looking at a tax bill that doesn't make sense? Before you click "submit" and overpay the government, let’s perform an Equity Audit. We will reconcile your W-2 against your supplemental brokerage reports to ensure you are paying exactly what you owe, and not a penny more.
Written by Kindled Planning: Light the way to your financial future.
A CPA-led personal CFO service helping families and business owners make confident, tax-smart financial decisions, without losing sight of what matters most.
