Sale of stock options

[appelman]

I have a client who has just brought me a 1099-B with a large number of same-day purchase-sale transaction of his employer's stock, all coded A, with basis shown. All but one of these has a trivial loss, presumably a sales commission, and are presumably nonqualifying stock option transactions. The one that is different, however, shows a near-zero basis, though otherwise it looks no different from the others. Total proceeds are 105,000; total basis is 93,855. If we leave out the outlier, total proceeds are 93,584, and total basis is 93,607. His W2 shows nothing relevant in box 12, but box 14 has the notation ISODQDISP 102174.60, which doesn't seem to quite match up with anything. Has anybody any idea what might be going on here?

[FEDUKE404]

Code explained

Sounds seriously like a disqualifying disposition for an incentive stock offering.

EXPLANATION

"Disqualifying ISO dispositions are taxed in two ways: there will be compensation income (subject to ordinary income rates) and capital gain or loss (subject to the short-term or long-term capital gains rates)."

FE

[appelman]

Yeah, but...

Pretty hard to get much capital gain on a same-day sale! I'm thinking of entering it with an adjustment code B, unless we can get a convincing explanation from the broker.

Sounds seriously like a disqualifying disposition for an incentive stock offering.

EXPLANATION

"Disqualifying ISO dispositions are taxed in two ways: there will be compensation income (subject to ordinary income rates) and capital gain or loss (subject to the short-term or long-term capital gains rates)."

FE

[AJsTax]

Most of the ones

I have dealt with like your situation will have the amount in box 14 added to box one and income tax will be withheld on that or at least due.
The basis then for the sales, if all the stock in box 14 is sold, will be the amount in box 14. he already paid income taxes on that amount.

[appelman]

Maybe not quite.

Basis should be W2 income PLUS exercise price ("strike price"), so it should be somewhat more than the W2 income. With same-day sales, there generally is no capital gain. All of which makes me think that the broker made a boo-boo.

I have dealt with like your situation will have the amount in box 14 added to box one and income tax will be withheld on that or at least due.
The basis then for the sales, if all the stock in box 14 is sold, will be the amount in box 14. he already paid income taxes on that amount.

[mactoolsix]

No form 3921? Maybe the client forgot to provide this - they usually do. . .

[appelman]

No.

I've asked the client to get hold of it, so far to no avail.

No form 3921? Maybe the client forgot to provide this - they usually do. . .

[Burke]

I have a client who has just brought me a 1099-B with a large number of same-day purchase-sale transaction of his employer's stock, all coded A, with basis shown.

In a subsequent post, you indicated you were inclined to report using Code B. Doing this may cause problems. IRS is looking for it under A. There should be an adjustment column in your software (and on the form) to adjust the basis up or down to what it should be (once you figure it out.) This is the correct way to handle it.

[appelman]

Are you sure?

Code B means that the reported basis is incorrect. You show the basis as given by the broker and then apply an adjustment. My software only allows an adjustment if some code is selected. I might throw in an 8275 for good measure. I'm still hoping my client can come up with a Form 3921.

In a subsequent post, you indicated you were inclined to report using Code B. Doing this may cause problems. IRS is looking for it under A. There should be an adjustment column in your software (and on the form) to adjust the basis up or down to what it should be (once you figure it out.) This is the correct way to handle it.

[Gary2]

Perhaps people are confusing code B (a code entered in Column f to indicate a basis correction) with box B (a box at the top of the 8949 to indicate that the issuer did not provide the IRS with basis).

Also, getting back to the discrepancy between the 102174.60 in box 14 and the $105K proceeds, there are two things to consider: One is that any amount paid to exercise the options won't be added to income (as already said). The other is that the imputed ordinary income is based on the FMV, which is the average of the high and low for the day. A 6% swing in price in one day isn't unheard of.

[appelman]

Right on both counts

I realized afterward that Burke was thinking of Box B. And the exercise price is not added to income, but it IS part of the employee's basis.

Perhaps people are confusing code B (a code entered in Column f to indicate a basis correction) with box B (a box at the top of the 8949 to indicate that the issuer did not provide the IRS with basis).

Also, getting back to the discrepancy between the 102174.60 in box 14 and the $105K proceeds, there are two things to consider: One is that any amount paid to exercise the options won't be added to income (as already said). The other is that the imputed ordinary income is based on the FMV, which is the average of the high and low for the day. A 6% swing in price in one day isn't unheard of.

[Nashville]

What Appears

What appears to me under most situations to be the case is inconsistent with the information Appelman is having to deal with.

We might start with terminology. Most likely only ONE of the transactions is a real exercise of stock options (unless there were multiple dates).
This transaction would have very low basis (as Appelman has described) and would become income upon exercise of the options. I am at a loss to explain why there is a 1099-B for this, as this should be treated as compensation and the income appearing on the W-2.

After this transaction, the client has REAL STOCK and not stock options. Conventionally, there will be less real stock because upon exercise, the employer should simultaneously buy back some of this stock to cover the employee's withholding. Going forward from the exercise, there could be several transactions where the client has traded some of this "real" stock on the open market. He could have sold this stock piecemeal, in this case there was no repetitive trading, but instead a piecemeal disposition of this stock over a short period of time. One indication that this has taken place would be to calculate the basis PER SHARE as reported. If all of the dispositions have the same basis per share then you can be certain that this has happened, and there was no "real" trading after the exercise, but dispositions only. For the many "real" stock transactions, there would be very little difference between selling price and basis.

Most of you know that the above-described narrative describes what SHOULD have happened. The information as presented to Appelman just doesn't make sense. If the records of the client are insufficient, either the employer or the transfer agent for the stock should be consulted.

Another follow-up question might be what should Appelman do if he finds out the exercise of the options was in fact compensation and has been misreported as a capital gain transaction. This is a strong possibility if my hunch is right.

[Gary2]

What appears to me under most situations to be the case is inconsistent with the information Appelman is having to deal with.

We might start with terminology. Most likely only ONE of the transactions is a real exercise of stock options (unless there were multiple dates).
This transaction would have very low basis (as Appelman has described) and would become income upon exercise of the options. I am at a loss to explain why there is a 1099-B for this, as this should be treated as compensation and the income appearing on the W-2.

The exercise of an ISO, unlike non-qualified options, is not a taxable event, except for AMT purposes, and would normally not impact the W-2 at all. No withholding is required upon exercise.

After this transaction, the client has REAL STOCK and not stock options. Conventionally, there will be less real stock because upon exercise, the employer should simultaneously buy back some of this stock to cover the employee's withholding.

This happens with NQOs, as well as RSUs and the like, but not with ISOs.

What happens instead, with ISOs, is that many employees will choose a cashless exercise, selling their stock the same day as the exercise. Others might have the choice of selling just enough to cover the purchase price. The last possibility (which I'm pretty sure I did at least once in my life) is to send the company a check to cover the exercise price, with no sale taking place.

[appelman]

All is solved.

I got the 3921. The sum of the differences between FMV and exercise price totals exactly the amount added to wages. The sum of FMV's is slightly more than the total proceeds. The broker's basis for that one transaction was simply an error.