Filing tax with stock options

taxpayer_2425
taxpayer_2425 Member Posts: 1 Newcomer
edited February 21 in Income

Hello,

I was looking for advice regarding my current tax situation described in the example below:

I worked at company X (private and not publicly traded) and received ISO stock options. I exercised 10 stock options at value $1 per stock. The FMV at the time of my exercise is $5. I sold 5 stocks within two months (held onto it for less than a year) through an external agency for $10 per stock. I received a W2, Form 3921 (422b) and 1099-B. My questions are:

  1. Is my W2 required to report anything specific in this case? I believe my W2 only reports my regular salary (nothing in boxes 12 or 14).
  2. Some amount of commission was deducted by the external agency. Can that be deducted from my profits? This commission is not shown on 1099-B.
  3. Can I deduct the purchase price of the stocks from my profits (all or just the portion that was sold)?
  4. Does FMV matter at all in my case? Can I just report my total profits as ordinary income (possibly deducting external agency commission and purchase price of stock if applicable)?

Advice on how I should fill out the tax forms for this case, would be greatly appreciated!

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Answers

  • MatthewD
    MatthewD FreeTaxUSA Team Posts: 503

    HI taxpayer_2425,

    In order to have a qualifying disposition when you sell your stock you'll need to hold the stock for:

    • At least two years after the grant date AND
    • At least one year after the exercise date

    If you sell the ISO stock before the two-year grant date and one-year exercise date, the sale will be a disqualifying disposition. That means the smaller of the bargain element (the difference between the exercise price and the market price on the exercise date) or the gain from the sale* is reported as compensation on your W-2. *Sometimes the gain can't be used if it's a related party transaction, wash sale, or was gifted.

    Your employer or former employer should report the ordinary income to you as wages in Box 1 of your W-2. Check that your employer has included the correct ordinary income on your W-2. The W-2 may have an item in Box 12, or a note in Box 14. If you are not sure, call your employer's payroll department. If the income is not correctly included on your W-2, contact your employer to get a corrected W-2.

    You should receive Form 3921 when you exercise an ISO.

    1. Some information is on your W-2. That is the income for the value of the stock at the time you exercised the option.
    2. No, that is not a deductible expense
    3. No, that is not a deductible expense
    4. Report the gain as a capital gain for the sale of stock.

    Also, see this article for an example of an ISO entry.

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