How to report "Exercise of Incentive Stock Options"

[kimberlyjo]

helpful

thank you very much. have a great day! :-)

[joanmcq]

Employee stock options are either ISO, ESPP, or everything else. "Everything else" are all nonstatutory, but usually called NQSO (for Non-Qualified Stock Options).

ESPP is never taxed on exercise, only on sale, and they're exempt from FICA. Form 3922 is usually required to be issued on exercise (but only because it's common to put the shares into a brokerage account). It's never required that they be sold on exercise, since the cost has already been set aside out of paychecks, but many people make an investment decision to sell on exercise.

ISO isn't subject to regular income tax on exercise, but may be subject to AMT. They're also exempt from FICA. It's common for people to sell some immediately at exercise, in order to cover the option's exercise price, but it's not necessary. Form 3921 is issued on exercise.

NQSOs are generally taxable at exercise, are subject to both FICA and withholding, and are the only ones that should be reported in Box 12 as code V. In theory, the employer could gross-up by paying the employee's FICA and withholding out of payroll, and adding these additional amounts to the employee's wages, but I've never seen that done. Instead, they contractually get the right to sell enough of the exercised shares to cover the payroll taxes. Thus, when you see the code V, you should expect there to be a sale.

RSUs, RSAs, etc. are not stock options at all, though they may look similar in terms of cash flow. Since they're not options, they shouldn't be reported as code V. RSUs may or may not result in actual stock ownership, so it's possible to get an RSU that looks more like a cash bonus.

Sorry, this very clear. ISOs NEVER appear in box 12 with a code V. I always ask for the end of year pay stub along with any of the letters received from the employer regarding the options.

The best way to get good at something lie, this is to do a lot of them. If you don't, this definitely isn't something to be learning April 13. Extensions are our friend.

[Steve Stang]

Best resource for understanding stock options I've found is http://www.mystockoptions.com/articl...7D1CAC6F762CB4 .

[FEDUKE404]

Clear as mud

Employee stock options are either ISO, ESPP, or everything else. "Everything else" are all nonstatutory, but usually called NQSO (for Non-Qualified Stock Options).

ESPP is never taxed on exercise, only on sale, and they're exempt from FICA. Form 3922 is usually required to be issued on exercise (but only because it's common to put the shares into a brokerage account). It's never required that they be sold on exercise, since the cost has already been set aside out of paychecks, but many people make an investment decision to sell on exercise.

ISO isn't subject to regular income tax on exercise, but may be subject to AMT. They're also exempt from FICA. It's common for people to sell some immediately at exercise, in order to cover the option's exercise price, but it's not necessary. Form 3921 is issued on exercise.

NQSOs are generally taxable at exercise, are subject to both FICA and withholding, and are the only ones that should be reported in Box 12 as code V. In theory, the employer could gross-up by paying the employee's FICA and withholding out of payroll, and adding these additional amounts to the employee's wages, but I've never seen that done. Instead, they contractually get the right to sell enough of the exercised shares to cover the payroll taxes. Thus, when you see the code V, you should expect there to be a sale.

RSUs, RSAs, etc. are not stock options at all, though they may look similar in terms of cash flow. Since they're not options, they shouldn't be reported as code V. RSUs may or may not result in actual stock ownership, so it's possible to get an RSU that looks more like a cash bonus.

With all due respect, how is an "ordinary" tax person supposed to understand all of this gibberish? ? ?

It would appear the main reason that some option exercise information (of the nonstatutory type) ever appears with Code V on the W2 is to deal with related possible AMT issues. Otherwise just a mere coincidence that the same number can also help with tracking down the elusive ordinary income.

Otherwise, to get the needed information (re amount of ordinary income from those other types of stock exercise) the tax person must hope for a client who is "on top of things" and/or has a well-oiled HR department to provide the necessary information to the employee. If not, the ordinary income numbers can rattle around quietly within the W2.

Sounds like a fine way to do things. To the best of my knowledge, I have never encountered either a Form 3921 or a Form 3922 although I do see a couple of "Code Vs" each tax season.

Good grief - and I thought fighting through a "simple" Form 1098-T was problematic.

FE

[Gary2]

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.

Employee stock options are either ISO, ESPP, or everything else. "Everything else" are all nonstatutory, but usually called NQSO (for Non-Qualified Stock Options).

ESPP is never taxed on exercise, only on sale, and they're exempt from FICA. Form 3922 is usually required to be issued on exercise (but only because it's common to put the shares into a brokerage account). It's never required that they be sold on exercise, since the cost has already been set aside out of paychecks, but many people make an investment decision to sell on exercise.

ISO isn't subject to regular income tax on exercise, but may be subject to AMT. They're also exempt from FICA. It's common for people to sell some immediately at exercise, in order to cover the option's exercise price, but it's not necessary. Form 3921 is issued on exercise.

NQSOs are generally taxable at exercise, are subject to both FICA and withholding, and are the only ones that should be reported in Box 12 as code V. In theory, the employer could gross-up by paying the employee's FICA and withholding out of payroll, and adding these additional amounts to the employee's wages, but I've never seen that done. Instead, they contractually get the right to sell enough of the exercised shares to cover the payroll taxes. Thus, when you see the code V, you should expect there to be a sale.

RSUs, RSAs, etc. are not stock options at all, though they may look similar in terms of cash flow. Since they're not options, they shouldn't be reported as code V. RSUs may or may not result in actual stock ownership, so it's possible to get an RSU that looks more like a cash bonus.

[Lion]

Your client probably received an explanatory letter that he needs to bring you, or get a copy from his HR and bring you. And, use this opportunity to train him to keep ALL documents regarding his stock options, of every kind, now and in the future.

[BP.]

when/why a Code V ("Income from Exercise of Nonstatutory Stock Options") does or does not appear in Box 12 of the employees W2.

Page 19 of the W2 instructions:
http://www.irs.gov/pub/irs-pdf/iw2w3.pdf

And TTB p. 6-18 under "Employer Reporting."

It used to seem that these felt like reinventing the wheel each time, but this year the reporting has been really good. I've had ISOs, NSOs, ESPPs, RSUs this year, but much better and more uniform documentation.

[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

[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.

[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.

[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.]

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]

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.

[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.

[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.