Does exercise of ISO's get shown on the W-2?

[John of PA]

If a client excercised ISO stock options (but did not sell the stock), it is a AMT tax preference items. How are we, the preparer supposed to know that they excercised ISO's. I assume it should be on thier W-2 as box 12 or 14 information, but I do not see a code for it. Client is telling me he exercised ISO's during 2011 but his W-2 does not say so, but client is telling me he did. His W-2 does have a box 12 code V amount, but that is other options (non-statatory that are included in box 1 taxable wages). My question is, aren't employers required to report the exercise of ISO's on form W-2 for informational purposes? If so what code is used. Thanks

[DaveinTexas]

Not on W2 but sometimes on Form 3921

If a client excercised ISO stock options (but did not sell the stock), it is a AMT tax preference items. How are we, the preparer supposed to know that they excercised ISO's. I assume it should be on thier W-2 as box 12 or 14 information, but I do not see a code for it. Client is telling me he exercised ISO's during 2011 but his W-2 does not say so, but client is telling me he did. His W-2 does have a box 12 code V amount, but that is other options (non-statatory that are included in box 1 taxable wages). My question is, aren't employers required to report the exercise of ISO's on form W-2 for informational purposes? If so what code is used. Thanks

Hello John,

Great question about a very confusing topic. These options that were exercised (purchased) but not sold will not be reported on the W2 unless there was a cashless exercise (immediate sale) within the tax year. If the TP exercised and held the shares beyond the end of the tax year these options will (sometimes) be reported on Form 3921. In fact, I think the IRS started requiring these forms to be reported last year, or maybe beginning this year.

The fact that this form is required tells me that the IRS is matching this form with the W2 (for a cashless exercise), the Schedule D (also for a cashless exercise) and the form 6251 (for a exercise and hold; AMT preference item event).

You probably already know but for others that may be viewing this post, you will most likely have an AMT entry on line 14 of the 6251. My advice for this unnecessarily complex area of the tax code is to review the instructions for form 6251.....and just before you tear your hair out after reading that junk, look at a site called Fairmark.com. There is a great section regarding AMT events involving exercising stock options, dual basis stock transactions, ISO swaps etc. It also walks you through the process of selling ISOs after they are held beyond a year and what adjustments to AMT to make.

My favorite part of ISOs, trying to explain to the client why they owe tax on money they never received and (in the case of the dot com bubble) may never receive.

[John of PA]

Thank you Daevin, that was very helpful. The moral of the story is if the client even mentions the word option, we must ask DID YOU EXCERCISE ANY ISO's,, ARE YOU SURE, becasue there is no tax reporting 1099 type form that will tell us this. Thank you again.

[Gary2]

Great question about a very confusing topic. These options that were exercised (purchased) but not sold will not be reported on the W2 unless there was a cashless exercise (immediate sale) within the tax year. If the TP exercised and held the shares beyond the end of the tax year these options will (sometimes) be reported on Form 3921. In fact, I think the IRS started requiring these forms to be reported last year, or maybe beginning this year.

As far as I know, the 3921 is required for calendar 2011, with one exception for non-resident alien employees who don't get a W-2.

The W-2 is a bit more complicated to explain. The only real requirement is that any ordinary wage income that comes about from the sale of ISOs must be included in box 1. It doesn't have to be a cashless exercise. For example, an employee could choose to exercise ISOs by paying cash in February, and then sell some of those acquired shares in November. If the employee is still working for the employer, then the employer is required to add the appropriate amount to the W-2. Likewise if there's a cashless exercise and a subsequent sale of the same batch later in the same year.

The imputed ordinary income from selling stock acquired via statutory stock option palns doesn't have to be identified explicitly on the W-2, though it should show up if you try to reconcile the box 1 and 5 amounts. In a common situation, box 1 will be regular wages plus imputed income minus 401k or similar deferrals, while box 5 will be regular wages without deducting the 401k or adding the imputed income.

[DaveinTexas]

Always keeping us on our toes

As far as I know, the 3921 is required for calendar 2011, with one exception for non-resident alien employees who don't get a W-2.

The W-2 is a bit more complicated to explain. The only real requirement is that any ordinary wage income that comes about from the sale of ISOs must be included in box 1. It doesn't have to be a cashless exercise. For example, an employee could choose to exercise ISOs by paying cash in February, and then sell some of those acquired shares in November. If the employee is still working for the employer, then the employer is required to add the appropriate amount to the W-2. Likewise if there's a cashless exercise and a subsequent sale of the same batch later in the same year.

The imputed ordinary income from selling stock acquired via statutory stock option palns doesn't have to be identified explicitly on the W-2, though it should show up if you try to reconcile the box 1 and 5 amounts. In a common situation, box 1 will be regular wages plus imputed income minus 401k or similar deferrals, while box 5 will be regular wages without deducting the 401k or adding the imputed income.

I notice that many of your responses are corrective ones. While this can be annoying to some I do appreciate your candor and your willingness to chime in. Keep up the great work sir!

[okie1tax]

ISOs exercised

If you don't have that 3921 to get all the right values for the worksheet your client probably will pay more in taxes than necessary. Ain't no other way to get those values that I was able to find. After showing my client the amounts he would pay taxes on if he did not furnish the 3921, he was able to get his broker to furnish it. The broker furnished it as a service for the company, yours may come from the company itself.

[John of PA]

If I understand this correctly, it's the Non-Statutory Options that get reported on the W-2, the sale (not exercise) of ISO's get reported on Sch. D with the 15% maximum rate if the holding period requirements were met.

[DaveinTexas]

That's correct.

If I understand this correctly, it's the Non-Statutory Options that get reported on the W-2, the sale (not exercise) of ISO's get reported on Sch. D with the 15% maximum rate if the holding period requirements were met.

It is all about the holding period.

[Gary2]

If I understand this correctly, it's the Non-Statutory Options that get reported on the W-2, the sale (not exercise) of ISO's get reported on Sch. D with the 15% maximum rate if the holding period requirements were met.

Correct but incomplete. You already know the AMT issue, plus even if the holding requirement isn't met, the sale of ISOs must be reported on Sch. D (with a higher basis, shifting some income to line 7).

[JohnH]

A big "thank you" to everyone participating in this thread. It caused me to go back & take a second look at a return which was on extension & ready for client signature, and I realized I hadn't handled the ISO correctly. (I had included the ESPP ordinary income in the long term capital gain). The increase in tax was only a couple of hundred dollars, but now it's correct and I learned something from all of you.

[okie1tax]

Espp

The attached is a PDF of a spreadsheet I used when I had an ESPP. Would like opinions as to helpful or not.
Thank you

James

[okie1tax]

More Espp

Completed spreadsheet