How to report "Exercise of Incentive Stock Options"

[kimberlyjo]

Have Form 3921, option granted, 4-24-12
option exercised, 12-27-13
Cost of shares $13,358
FMV of shares when exercised is $28,451

Also have Form 1099-B with proceeds of $44,505

How it is this transaction reported ?

Thank you so very much.

[BP.]

Need more info

option exercised, 12-27-13

Since we're into 2014 returns now, was the date of sale in 2014?

Look at Pub 525, and TTB 6-2. Check the paystub for the period when the sale occurred for anything included as compensation.

[FEDUKE404]

Simple answer

Assuming the disposition WAS during 2014:

There have been several recent related discussions on these boards. Suggest you search for the topic.

In the simplest of terms, the taxable capital gain is likely the difference between the sale price and the FMV at time of exercise. The actual "cost" is not relevant except for tracking purposes. In all likelihood, the employee already paid (regular) income tax on the 2013 income that resulted when the stock was bought at a discount, hence raising the cost basis. Did you prepare the 2013 income tax return? ? ?

FE

[BP.]

In all likelihood, the employee already paid (regular) income tax on the 2013 income that resulted when the stock was bought at a discount

Kimberlyjo posted this is an ISO.

Pub 525, ISO:
Exercise of option. If you exercise a statutory stock option, do not include any amount in income when you exercise the option.

I wouldn't expect compensation to be realized at date of exercise, rather at date of sale.

[AZ-Tax]

These can be a nightmare

If the ISO appeared on the W-2 box 14, look at the itemized section of the W-2 to see if the ISO was included in box 1. If the itemized section does specify, contact HR of the company.

[BP.]

W-2 box 14

That's for an NSO. For ISO included in box 1, you'll likely need paystub to determine.

[AZ-Tax]

I have a W-2 sitting in front of me that is reporting in box 14 Other ISO

That's for an NSO. For ISO included in box 1, you'll likely need paystub to determine.

I have a W-2 sitting in front of me that is reporting in box 14 Other ISO. TP looked at his paystub and the section of the W-2 that itemizes breakdowns deductions etc. and couldn't tell. TP was to call his HR dept. TP employed with a large publicly traded Co.

[BP.]

You're right

reporting in box 14 Other ISO.

So sorry to muddy the water; I mixed the boxes! NSO would be box 12; box 14 for various misc info. ISO may or may not show up there.

[kimberlyjo]

date of sale

Yes the date of sale was 6/25/2014. There is no information in box 14, on the W-2, for tax year 2013 and tax year 2014. Thank you again.

Since we're into 2014 returns now, was the date of sale in 2014?

Look at Pub 525, and TTB 6-2. Check the paystub for the period when the sale occurred for anything included as compensation.

[kimberlyjo]

Wanna Be Sure, Help

I would like to understand how this is reported, thank you for your help.

Yes the date of sale was 6/25/2014. There is no information in box 14, on the W-2, for tax year 2013 and tax year 2014. Thank you again.

[BP.]

I would like to understand how this is reported.

Have you looked at Pub 525 in the ISO section? It should really help. I think there's even an example similar to yours. You'll use Schedule D for the capital gains portion and likely need to add an amount on line 7 as compensation for the ordinary income portion, if it wasn't already included on the W2.

[kimberlyjo]

The answer to your ?

I did look at pub 525 and the Tax Book. I thought that this discussion board was to help you with an unfamiliar situation. Never dealt with ISO, confusing, I might add. Just wanted to be sure.

And if this transaction was not on the W-2, client should check with HR to see if was included in compensation before I add it to line 7? Correct?

Thank you for your help.

Have you looked at Pub 525 in the ISO section? It should really help. I think there's even an example similar to yours. You'll use Schedule D for the capital gains portion and likely need to add an amount on line 7 as compensation for the ordinary income portion, if it wasn't already included on the W2.

[BP.]

Here'd be my method in this case:

Sometimes an old fashioned paper and pencil help me to work out an issue and see the transaction components.

On a piece of scratch paper, I'd draw the chart from the ISO section of Pub 525, which I think closely matches your case.

Plug in your numbers. Gross proceeds minus option cost is gain. Some of that gain, the spread between the FMV and option cost, is ordinary income. Pub 525 says the ordinary income should be in the W2, but might not be. Employee needs to check. Paystubs help with this step.

Rest of gain is capital gain to go onto Schedule D. Report the gross sale proceeds there. Basis is option cost plus amount treated as ordinary income.

I hope that's a little more helpful.

[Burke]

Had this exact scenario and we had to go to payroll dept to get the breakdown. ISO info not on W-2 in any other box. Turns out it WAS included in Box 1 but not shown separately on W-2 anywhere else. We couldn't make the numbers come out between Box 1 & 3 due to other items subject/not subject to tax.

[FEDUKE404]

Chasing down that ordinary income number

Had this exact scenario and we had to go to payroll dept to get the breakdown. ISO info not on W-2 in any other box. Turns out it WAS included in Box 1 but not shown separately on W-2 anywhere else. We couldn't make the numbers come out between Box 1 & 3 due to other items subject/not subject to tax.

It's been my experience that tracking down the ordinary income is routinely the most difficult part of the process. The search is made more difficult when the employee has no idea of how the option process works and/or never really looks at his monthly payroll statement.

I'm still a bit confused as to when/why a Code V ("Income from Exercise of Nonstatutory Stock Options") does or does not appear in Box 12 of the employees W2.

FWIW, I've encountered several DIY clients who paid way too much tax by not understanding the process. They just take the "sale" price and reduce it by the "paid" price and pat themselves on the back for figuring out how to report a stock sale. . . This seems more common for the cashless stock option exercises, aka "Show me the money!!"

FE