Exercising and selling stock options (ISO) of a private company

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dozydoods
dozydoods Member Posts: 3 Newcomer

Hello there!

I have 2 questions that I need help with. I don't have the greatest understanding of the topic, so let me know if I'm not providing enough information. Thanks!

1. The private company that I currently work for is planning to hold a secondary sale to allow existing employees to sell some of their vested stock options (ISO). I'm planning to take advantage and exercise/sell some.

The first time we had a secondary, my company provided me with a W2c Schedule (in an excel sheet) and a form 3921 (in the mail). I did not receive a 1099-B from Carta as the sale was handled outside of their platform. My company recommended filing a Form 8949, which my family's tax guy filled out. This time around, I will be filing taxes on my own and was wondering if it would be straightforward to fill things out via FreeTaxUSA if I was provided with a W2c Schedule and Form 3921 for the next filing season.

2. If I plan to exercise the stock options and hold them, does FreeTaxUSA support reporting this information? I think this would be reported under Form 6251 (Alternative Minimum Tax), but I've read that it may not be supported currently. Would I need to use a different platform or file it on my own somehow?

Thanks in advance for all the help!

Best Answer

  • KristineS
    KristineS FreeTaxUSA Agent Posts: 109
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    Hi @dozydoods -

    Those forms 'might' be enough. I really have no way to say.

    If you're pretty savvy and know how to read and interpret the information on the forms for your stock sales it could be fairly simple for you. If you've never had to interpret these statements on your own for tax filing purposes it could be tricky.

    We do offer Pro Support to assist our customers. And while we don't review or interpret tax documents, we can help you understand where entries need to be made, or guide you through the investment/stock portion of the software if you need help, for instance.

Answers

  • KristineS
    KristineS FreeTaxUSA Agent Posts: 109
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    Hi dozydoods, thanks for writing in with your questions.

    A quick point of clarification. Form W-2c is a corrected W-2. Meaning the employer made some sort of correction to the original W-2 you were given due to a mistake the employer made. You 'should' just be receiving a W-2.

    ISO - or Incentive Stock Options - are handled in FreeTaxUSA software. They're a tax-favorable form of stock compensation where you don't need to report ordinary wage income when you exercise the ISO. Qualifying ISOs only generate reportable income when the stock is sold as long-term capital gains. Nonqualified stock options (NQSO or NSO) are another form of incentive stock option that aren't as tax favored.

    Qualifying means when you sell your stock you'll need to hold the stock for:

    1. At least two years after the grant date AND
    2. 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.

    You'll have taxable income or a deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don't meet special holding period requirements, you'll have to treat income from the sale as ordinary income.

    After exercising an ISO, you should receive from your employer a Form 3921, Exercise of an Incentive Stock Option Under Section 422(b). This form will report important dates and values needed to determine the correct amount of capital and ordinary income (if applicable) to be reported on your return.

    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. This may be the W-2c you are referring to for the previous year becuase your employer made a correction.

    If you hold the ISO stock long enough to have a qualifying disposition, you'll need to report the bargain element as compensation on Form 6251 in the year that the ISO is exercised.

    In the year that you dispose of the ISO stock, there'll be an adjustment for the gain on the sale of the ISO stock. This is because the cost basis of ISO stock is different for regular tax and AMT. For regular tax, the cost basis of the ISO stock is the exercise price paid for the stock only. However, because the bargain element was taxable for AMT, the AMT cost basis of ISO stock is equal to the exercise price plus the bargain element that was previously included in AMT. You'll need to report any necessary adjustment on Form 6251.

    We support ISO transactions that aren't qualified and were sold in the same year they were exercised. If the exercised options weren't sold the same year or you have qualified ISO transactions, we won't be able to support your situation and you'll have to file with another software.

  • dozydoods
    dozydoods Member Posts: 3 Newcomer
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    Thank you for the answer, @KristineS!

    This is super helpful information!

    It sounds like in my case were I'll be exercising and selling within the same year, it would be a disqualifying disposition and is supported. Does that mean the software would fill out a Form 8949 for me provided the information from a W-2c and Form 3921?

    Lastly, are there any plans to support qualified ISO sales/transactions in the future?

    Appreciate the help!

  • KristineS
    KristineS FreeTaxUSA Agent Posts: 109
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    Hi again dozydoods. Glad you found that helpful.

    Form 8949 is automatically created based on entries in the software. These types of transactions are entered under Common Income > Stock or Investments Sold (1099-B). Information from a W-2 or W-2c are wage related and work together with Form 8949 and other information on your tax return.

    Form 3921 is considered "information only" and is not reported in and of itself (like a W-2 or 1099-INT for bank interest). It will help you determine your cost or other basis, as well as the holding period for stock. You'll use this information along with information on Form 1099-B to make your entries in the program. These entries will create both Schedule D and Form 8949.

    We are continuously improving our software to support and enhance our customer's experiences and tax needs. I will send your question up the line to our developers and management team.

  • dozydoods
    dozydoods Member Posts: 3 Newcomer
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    Thank you, @KristineS!

    I don't believe I received a Form 1099-B the last time I went through this since the sale transaction happened outside of Carta (what my company uses for stock options) from what I understand. Would this make filing taxes harder? My previous tax preparer (that my family used) was able to file my taxes without it. Will the W-2c and Form 3921 be enough?

    Thanks again for your replies, I really appreciate the help here!