Stock options with no sale

[Possi]

My client has box 12 code V stock options going back to 2010, with no sales.
2010, 7k
2011, 59k
Now, she has 1099B for 3K

She said the stock sold is not the same as the stock options. It's all the same company, but she says it isn't the same stock. I am totally confused.
How do I know what the basis is for the stock sold?

[Golden Rocket]

Exercise and sale are not the same

It is so common that when employees exercise options that they turn around immediately and cash them out, as if they were
a cash bonus.

So common, in fact, that many people are fooled into thinking both the exercise and sale are one transaction, performed
in one fell swoop.

However, they are distinct transactions, even if they occur on the same day. EXERCISING the options results in the employee
owning stock, and he doesn't HAVE to sell it. Also results in the value of the options being added to the taxable pay of the
employee's W-2. After exercise, the employee can hold the stock as long as he wishes without cashing it in.

So the appearance of 2010 and 2011 W-2s with option exercised refers only to the EXERCISE and does not address what the
employee does with the stock. If the employee sells the stock at a later date (or later year) he/she should receive a 1099-B
for the proceeds of the sale in the year the sale occurs. The basis of the stock should be the strike price as of the date of the
exercise.

[BP.]

The basis of the stock should be the strike price as of the date of the exercise.

Wouldn't basis be strike price (exercise price) plus amounts treated as compensation (on W-2) when options were exercised? TTB 6-2.

[Possi]

Yes...

Wouldn't basis be strike price (exercise price) plus amounts treated as compensation (on W-2) when options were exercised? TTB 6-2.

So I'm keeping the W2's but they only give me the total amount, not an individual share amount.

[FEDUKE404]

Not just W2 info is needed

So I'm keeping the W2's but they only give me the total amount, not an individual share amount.

As noted correctly by BP, the information on the W2 (for year or years involved) is relevant only to the separate taxable income that was created when the option was exercised. The compensation for the employee has been raised for merely exercising the option, and AMT issues may also slide into the picture.

You can't use that by itself to determine the cost basis for ANY sale, be it "cashless" or for someone who actually understands the concept of LTCG and sells the stock at a later date.

The true cost basis is the total of what he "paid" for the stock, increased by what he did NOT pay (the discount, that was already reported on the W2 as taxable income).

FWIW, after all the dust has settled it is not unusual to have a trivial amount to show up on Sch D when all the facts are properly considered. If the stock price was not all over the place on the date of exercise/cashless sale, there would likely be only a Sch D loss which essentially came from the broker fees to sell the stock.

It's been a few years since I faced one of these scenarios, so I would be curious to know how things have changed now that for most recent stock sales/purchases the accurate cost basis has to be shown and reported to the IRS via Form 1099-B. Anyone care to share??

FE

[Possi]

Basis now

As noted correctly by BP, the information on the W2 (for year or years involved) is relevant only to the separate taxable income that was created when the option was exercised. The compensation for the employee has been raised for merely exercising the option, and AMT issues may also slide into the picture.

You can't use that by itself to determine the cost basis for ANY sale, be it "cashless" or for someone who actually understands the concept of LTCG and sells the stock at a later date.

The true cost basis is the total of what he "paid" for the stock, increased by what he did NOT pay (the discount, that was already reported on the W2 as taxable income).

FWIW, after all the dust has settled it is not unusual to have a trivial amount to show up on Sch D when all the facts are properly considered. If the stock price was not all over the place on the date of exercise/cashless sale, there would likely be only a Sch D loss which essentially came from the broker fees to sell the stock.

It's been a few years since I faced one of these scenarios, so I would be curious to know how things have changed now that for most recent stock sales/purchases the accurate cost basis has to be shown and reported to the IRS via Form 1099-B. Anyone care to share??

FE

So, if she can't tell me what the basis is for the stock she sold, that is one problem. I'll call her on that.

The other will be when she sells the stock that she exersized options on, and figuring the increased basis to reflect the options that were bumped into her W2 on that stock.

Is it just me?

[Snaggletooth]

One Trap

The employee should have retained documentation from the exercise. Might be impossible to know basis if documentation
doesn't exist.

One trap may exist. Often some of the exercised shares are redeemed at the point of exercise to pay for tax withholding.
The basis would be the value per share at point of exercise and not to be confused by a lesser amount spread over the
total shares.

[Possi]

decision to do that?

The employee should have retained documentation from the exercise. Might be impossible to know basis if documentation
doesn't exist.

One trap may exist. Often some of the exercised shares are redeemed at the point of exercise to pay for tax withholding.
The basis would be the value per share at point of exercise and not to be confused by a lesser amount spread over the
total shares.

Would she have had to make a decision to do that? ... to redeem to pay for taxes?

[Burke]

Generally, no. The company usually withholds certain shares to cover the FIT, FICA/MC & State taxes due when it goes into the employee's pay. I have seen some (years ago) where the employee paid the necessary taxes by check to the company, but it's not often that happens, and I haven't seen it in a long time. Your TP should have (1) a full description of the company's stock option plan; (2) documentation when the options are awarded; (3) documentation when the shares are exercised; and (4) 1099-B's when the shares are sold. They need to keep all this information or get it from the company. Now that companies are "going green" a lot of this stuff may be online and they have to download it when it occurs. A fine kettle of fish if you ask me. Most of them don't have a clue what's going on. And there are some that have all these things, so it makes it easy.

[Burke]

My client has box 12 code V stock options going back to 2010, with no sales.
2010, 7k
2011, 59k
Now, she has 1099B for 3K

She said the stock sold is not the same as the stock options. It's all the same company, but she says it isn't the same stock. I am totally confused.
How do I know what the basis is for the stock sold?

You don't. She may have bought those shares she sold herself through a broker. It's up to her to tell you what shares she sold. Somebody had to tell the broker that sold them. Was it Computershare?

[Possi]

Keep it all...

Generally, no. The company usually withholds certain shares to cover the FIT, FICA/MC & State taxes due when it goes into the employee's pay. I have seen some (years ago) where the employee paid the necessary taxes by check to the company, but it's not often that happens, and I haven't seen it in a long time. Your TP should have (1) a full description of the company's stock option plan; (2) documentation when the options are awarded; (3) documentation when the shares are exercised; and (4) 1099-B's when the shares are sold. They need to keep all this information or get it from the company. Now that companies are "going green" a lot of this stuff may be online and they have to download it when it occurs. A fine kettle of fish if you ask me. Most of them don't have a clue what's going on. And there are some that have all these things, so it makes it easy.

... and keep the W2's so that when she sells, I can bring them to you and you will help me figure it all out, right??


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