Stock options and 1099b

[AZ-Tax]

ttbtaxes, ask your client for this document....

I have a client who did the exercise and sell on the same day. He got a W-2 with a "V" but never received a 1099-B. I told him there had to be one so he called the brokerage house who handled the transaction and they told him they don't issue a 1099-B. This is a major financial institution.I've never heard of this, has anyone else?

This is common not to receive a 1099-B. You will need to complete a Sch D in your clients case and use the document your client received from the brokerage house detaililng that trade or each trade. Each trade most likley consisted of a cluster of options similiar to trading a cluster of the same stock and there could be more then one trade each with a cluster of options. When you are all said and done, your client most likely will have a loss to extent of the trading commission. If no trading commission, probalby no loss. Incredible what the IRS will spend time on for $0 revenue for them yet let the real tax evaders go.

[BP.]

I have a client who did the exercise and sell on the same day. He got a W-2 with a "V" but never received a 1099-B. I told him there had to be one so he called the brokerage house who handled the transaction and they told him they don't issue a 1099-B. This is a major financial institution.

I've never heard of this, has anyone else?

I've had 3 already this year. When I see a W-2 with code V, I generally look for a 1099-B. Asked the clients to double check with the brokerages, but the answer was no 1099-Bs will be issued on these particular transactions.

[FEDUKE404]

Too many "ifs"

Not so minor caveat: I used to use "ESOP" generically like this. I've since learned that "ESOP" has taken on the meaning of certain retirement plans that involve stock ownership. So now I'm always specific: ESPP, ISO, non-statutory, and ESOP.

You obviously know far more about the potential issues involved here and/or what has not been stated by the original poster.

I am now politely exiting this thread.......

FE

[Gary2]

Minor caveat: There are all kinds of ESOP programs out there

Not so minor caveat: I used to use "ESOP" generically like this. I've since learned that "ESOP" has taken on the meaning of certain retirement plans that involve stock ownership. So now I'm always specific: ESPP, ISO, non-statutory, and ESOP.

[Gary2]

I have a client who did the exercise and sell on the same day. He got a W-2 with a "V" but never received a 1099-B. I told him there had to be one so he called the brokerage house who handled the transaction and they told him they don't issue a 1099-B. This is a major financial institution.

I've never heard of this, has anyone else?

Possibly, if they were acting as agent for the employer. The employer should provide the paperwork - which may or may not include a 1099-B filed with the IRS.

[Gary2]

When an employee exercises a stock option, the difference between the option price (what he pays) and the FMV on the date of exercise constitutes taxable (and ordinary) income.

Only for nonstatutory stock options, not ISOs.

It is not unusual for a person to do a cashless exercise, i.e. exercise the option (buy the stock) and sell immediately. It generates quick cash. The Schedule D consequences will be minimal (same day sale) but the ordinary income consequences (including AMT!) may have more impact.

Non-statutory options don't trigger AMT, because they don't benefit from a deferral. In a cashless exercise of ISO, the shares sold also don't trigger AMT - because the deferral is only for the brief period between exercise and sale. Often people will sell all the shares, and hence no AMT. It's only the exercise of ISO and keeping some of the shares that results in an AMT deferral item. Of course, the mere exercise and addition to income could trigger AMT without necessarily involving the stock as a deferral or exclusion item.

[Gary2]

Code V indicates he exercised the option this year. 1099B indicates he sold the stock in the same year.

The 1099-B indicates he sold some stock the same year - not necessarily the same shares that came about from the exercise.

Not sure why Code V amt and equity awards statement amt aren't the same, but they should be.

Only if they're talking about the same thing. The equity award statement might be referring to a restricted stock award, or some other type of stock benefit.

[ttbtaxes]

I have a client who did the exercise and sell on the same day. He got a W-2 with a "V" but never received a 1099-B. I told him there had to be one so he called the brokerage house who handled the transaction and they told him they don't issue a 1099-B. This is a major financial institution.

I've never heard of this, has anyone else?

[FEDUKE404]

Raises the cost basis

So my earlier client (not the one with the 1099B, but the one with the code V and NO sale of stock) who held on to the stock should keep track of the CODE V total from this year to balance the cost basis when she finally DOES sell.

Cost basis equals what she "paid" plus the amount of ordinary income created at the time of the stock option exercise.

In so many words, the actual cost basis will be close to the market value of the stock on the date she first obtained it, and not merely the amount of funds she expended for the purchase.

Minor caveat: There are all kinds of ESOP programs out there....especially over the years....so it always helps to know the specifics of the actual plan involved.

FE

[Possi]

Sold and held

So my earlier client (not the one with the 1099B, but the one with the code V and NO sale of stock) who held on to the stock should keep track of the CODE V total from this year to balance the cost basis when she finally DOES sell.

[FEDUKE404]

Simplest of answers

When an employee exercises a stock option, the difference between the option price (what he pays) and the FMV on the date of exercise constitutes taxable (and ordinary) income.

The cost basis is then raised by that same dollar amount. For all intents and purposes, the "money spent" is irrelevant - that can create great confusion for someone who does not understand the overall process.

It is not unusual for a person to do a cashless exercise, i.e. exercise the option (buy the stock) and sell immediately. It generates quick cash. The Schedule D consequences will be minimal (same day sale) but the ordinary income consequences (including AMT!) may have more impact.

For those who exercise the option, and hold onto the shares to (hopefully) create some capital gain income, it is important to keep adequate cost basis records. I still have some HRBlock (ahem!) stock I bought many moons ago - the check I wrote to "buy" the stock is quite different from my actual cost basis (excluding the necessary stock split adjustments).

FWIW: I found that many (most?) employees now use stock option exercise as a quick source of income, and frequently have no idea of what is going on "behind the scenes." That just makes it harder for the tax professional to obtain the facts as well as to explain what went on as related to the income shown on their tax return.

FE

[Possi]

Dates

Code V indicates he exercised the option this year. 1099B indicates he sold the stock in the same year. Not sure why Code V amt and equity awards statement amt aren't the same, but they should be. I would use Code V amt as the basis. Also, not sure where broker got basis for stock on 1099B. Does 1099B show an acquisition date?

80sh on 01-13-2011
81sh on 1-14-2011

both sold on 1-24-2011

[Burke]

Code V indicates he exercised the option this year. 1099B indicates he sold the stock in the same year. Not sure why Code V amt and equity awards statement amt aren't the same, but they should be. I would use Code V amt as the basis. Also, not sure where broker got basis for stock on 1099B. Does 1099B show an acquisition date?

[Possi]

Basis

Josh brings out a often-overlooked fact. Exercise of a stock option for an employers stock IS in fact compensation, and goes on the W-2. For example, exercise of 1000 shares at $21 per share results in $21,000 in compensation, and this is fully taxable not only for taxes but also for social security/medicare.

Since the exercise results in stock instead of cash, there is no Cash available from which to withhold these taxes. The most common result is that some of these 1000 shares are redeemed, perhaps 76.5 shares for SS/Medicare and another 150 shares for income tax.

Employee walks away with only 773.5 shares after being taxed on 1000 shares exercised. $21,000 appears on his W-2 for compensation, and another $3150 for FIT withheld and another $1606.50 for withheld FICA/Med. Basis in the 773.5 shares is still $21/share.

So, my NEXT client has
10982.00 code V in the W2

10625.00 in "taxable compensation" on the equity awards statement.

The 1099B has basis of just $6308.00

Sooooo...
I bump up the basis by the taxable compensation? If so, then why do you say the basis stays at $21/share? Is your example one where there is NOT a 1099B issued?

[Gary2]

Josh brings out a often-overlooked fact. Exercise of a stock option for an employers stock IS in fact compensation, and goes on the W-2. For example, exercise of 1000 shares at $21 per share results in $21,000 in compensation, and this is fully taxable not only for taxes but also for social security/medicare.

Since the exercise results in stock instead of cash, there is no Cash available from which to withhold these taxes. The most common result is that some of these 1000 shares are redeemed, perhaps 76.5 shares for SS/Medicare and another 150 shares for income tax.

Employee walks away with only 773.5 shares after being taxed on 1000 shares exercised. $21,000 appears on his W-2 for compensation, and another $3150 for FIT withheld and another $1606.50 for withheld FICA/Med. Basis in the 773.5 shares is still $21/share.

Close, but not exactly. "Exercise of 1000 shares at $21" implies they paid $21/share, so compensation is $0. More likely it's "Exercise of 1000 shares at $1/share with FMV of $22/share, resulting in $21,000" in compensation - and, in this case, basis of $22/share. Possibly another 46 shares were sold to pay the $1000 exercise price.