Forced sale of Stock Options Short Term vs Long Term

[KC-CPA]

I have a client who was Granted a stock option (ISO) 04/23/2019, He Exercised the Stock Option June 30, 2021, basis of $60,000. He was then forced to sell the stock for cash on August 6, 2021, due to an Acquisition, proceeds were $215K. Based on the exercise date and sell date, the gain of $155k is short term (not good for tax outcomes). For some reason I thought there was an exception that could be applied for LT vs. ST, making the sale LT due to forced sale, but I am not able to find anything indicating such an application. So, either I am confusing another tax issue or just wishfully thinking.

Are there any exceptions for forced sell of stocks allowing a long-term classification vs. short term classifications?

[Beersheba]

Check out TTB 6-3. I don't know whether this meets the situation or not:

For services rendered:

"Begins on the date the property becomes substantially vested, meaning it is either transferable or no longer subject to substantial risk...."

Clearly this applies to the stock options themselves - don't know whether it loses its applicability when it undergoes an involuntary conversion.

Begins on the date the property becomes substantially vested, meaning it is either transferable or no longer subject to a substantial risk of forfeiture.

[Rapid Robert]

You might be missing something important here. From the facts presented, this is a disqualifying disposition of ISOs. "In a disqualifying disposition, the difference between the grant price and the FMV of the stock at the time of exercise is recognized as ordinary income. It is reported by the employer on Form W-2, box 1. Any excess gain resulting from the sale of the stock is treated as short- or long-term capital gain, depending on how long the stock was held after the options were exercised."

It seems fantastic that the FMV of the stock increased over 350% in the five weeks between exercise and sale. Are you sure that his basis is only $60K? That might be what he had to pony up to exercise, but it is probably not the taxable ordinary wage income he has to recognize.

As a final note, you keep on emphasizing "forced". It wasn't "forced" if it was something he contractually agreed to, which I'm sure he did, or else there would have been a lawsuit. It's pretty clear to me that he wasn't in any hurry to exercise until he learned that there would be an income opportunity coming up in five short weeks due to an acquisition, so he finally did. If he was serious about getting the statutory benefit of ISOs, he would have exercised a long time ago.

[KC-CPA]

I agree with the ordinary income in wages but it does not show in box 1 and client confirmed his wages in box 1 did not include any income from the transaction, I was hoping that was the case but based on W-2 I do not see it. The difference in the exercise price and FMV of stock on date of exercise was about $8k, the rest would be gain on sale of stock.