Even though the income is included in your W-2 the amount from the exercise of the Nonqualified Stock Options is generally coded V in box 12 , you may also have a gain or loss from the sale of the stock.
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Even if the stock was immediately sold after it was purchased, you likely paid a commission to the brokerage firm, in which case the commission fee would likely represent the loss amount to include in your tax return. Or, if the sales price of the stock was an increase or decrease from the purchase price, then such gain or loss would also need to be included in your tax return. This information should be reported on Form , which then flows to the Schedule D of your tax return.
You should have received a Form B from the brokerage firm that handled the stock sale.
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In addition, the broker or your employer likely provided you with a statement describing how the gain or loss related to the cashless exercise should be reported in the tax return, or provided you the necessary information to make the calculations in order to determine how to properly report the sale in the tax return. One word of caution: if the Form B indicates a cost of the stock, it will not include the income included in your taxable wages for stock acquired after ; in this case your cost basis of the stock sold will need to be adjusted in order for you to avoid being taxed on the income twice, once in your taxable wages, and then again on the reporting of the stock sale.
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Employee stock options from your employer. March 02, by Frank Thomas. View All Articles. TaxAudit Blog Home. Submit a Question. The amount reported to you as income on Form W-2 by your employer at the time the stock vests will then be your adjusted cost basis in these stock units. ISO units must be held for at least one year after the options are exercised. In addition, you cannot sell the shares until at least two years after the options are awarded to you.
For these reasons, any discount you receive by purchasing these options are taxed as a long-term capital gain , which yields a lower tax rate than ordinary income.
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When these options are granted, they are granted at a predetermined price. When option is exercised, the employee has ordinary income for the difference between the price they pay grant price and the fair market value FMV on the date they purchased the stock exercise price. Any compensation income received from your employer in the current year is included on Form W-2 in Box 1. Review Boxes 12 and 14 as they list any income included on Form W-2 related to your employee stock options.
Non-Qualified Stock Options
You will receive a Form B in the year you sell the stock units. The form reports any capital gain or loss resulting from the transaction on your tax return. You should review your investment records to verify the cost basis amount on Form B. The cost basis on your Form B is based on information available to your brokerage. If the information available is incomplete, your cost basis amount may be incorrect. If your Form B is missing a cost basis amount, you must still calculate and report your cost basis on your tax return. Form is issued for incentive stock options in the year they are transferred to the employee.
It includes the necessary information to properly report the sale of these units when you decide to do so.
The Basics of How Non-Qualified Stock Options are Taxed – Daniel Zajac, CFP®
Save this form with your investment records. Since you have not sold the stock, the holding period requirements have not been determined. Therefore, the employer does not include compensation income on your Form W-2 as ordinary income. Employee Stock Purchase Plans ESPP This voluntary program, provided through your employer, allows you to make payroll contributions to be used to purchase company stock at a discount. Form W-2 Any compensation income received from your employer in the current year is included on Form W-2 in Box 1.