Tax Reporting of Stock Options

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Leesbro63
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Tax Reporting of Stock Options

Post by Leesbro63 »

I prepare tax returns for a close family member who works for a large corporation. In 2022, they exercised some stock options and immediately sold half of the stock and kept the other half. I want to be sure that I report this correctly, as I have not done this before.

Their W-2 includes the proceeds in Box 1, Wage Tips & Other Compensation. Box 14 also shows code DD and the amount of the stock option sale. It's not clear to me how the DD amount in box 14 translates into Turbotax, if at all. The amount of the sale, with a zero basis, is included in gross compensation, so I know that is being taxed.

This family member also got a Form 3921 that I've never seen before. It shows the exercise price per share, the fair market value on exercise and the amount of shares exercised.

I'm thinking that there is some sort of capital gain component here.

I don't expect a full tutorial on a Bogleheads thread for this, but perhaps one of the tax people can give me and overview and point me to some easy-to-grasp sources. I'm a pretty good amateur at this, but I'm not a CPA.
howard71
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Re: Tax Reporting of Stock Options

Post by howard71 »

Sounds to me like the proceeds of the sale were already taxed as ordinary income.

So don't make the same mistake I did years ago and assume you don't have to do anything else. If things still work the way they did back then, the brokerage transaction was reported to the IRS and needs to be accounted for with a schedule C (if memory serves me right) showing no gain on the transaction.

I got a shocking letter from the IRS when I failed to do this, informing me I owed them about $25k. Didn't have to pay it but it took me a while to figure it out and submit the schedule C.
Topic Author
Leesbro63
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Re: Tax Reporting of Stock Options

Post by Leesbro63 »

howard71 wrote: Sun Jan 22, 2023 9:03 am Sounds to me like the proceeds of the sale were already taxed as ordinary income.

So don't make the same mistake I did years ago and assume you don't have to do anything else. If things still work the way they did back then, the brokerage transaction was reported to the IRS and needs to be accounted for with a schedule C (if memory serves me right) showing no gain on the transaction.

I got a shocking letter from the IRS when I failed to do this, informing me I owed them about $25k. Didn't have to pay it but it took me a while to figure it out and submit the schedule C.
Do you mean Schedule D? I think you’re onto something but what to do is still fuzzy.
jebmke
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Re: Tax Reporting of Stock Options

Post by jebmke »

Leesbro63 wrote: Sun Jan 22, 2023 11:13 am
howard71 wrote: Sun Jan 22, 2023 9:03 am Sounds to me like the proceeds of the sale were already taxed as ordinary income.

So don't make the same mistake I did years ago and assume you don't have to do anything else. If things still work the way they did back then, the brokerage transaction was reported to the IRS and needs to be accounted for with a schedule C (if memory serves me right) showing no gain on the transaction.

I got a shocking letter from the IRS when I failed to do this, informing me I owed them about $25k. Didn't have to pay it but it took me a while to figure it out and submit the schedule C.
Do you mean Schedule D? I think you’re onto something but what to do is still fuzzy.
When NQ options are exercised in a cashless process, you will probably still get a 1099-B showing the sale. The flash sale may create a tiny gain or loss which is immaterial from a tax perspective. Nonetheless, it has to be reported because when the IRS does its matching process it sees the Gross Proceeds from the Sale but doesn't know anything about the basis (which is almost always nearly equal to the proceeds). Unless you report the sale on Form 8949 (and therefore on Schedule D) they will assume that the basis was zero and assess income tax on the Gross Proceeds.
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McDougal
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Re: Tax Reporting of Stock Options

Post by McDougal »

Is the code DD in Box 14 or box 12?
GeMoney
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Re: Tax Reporting of Stock Options

Post by GeMoney »

I'm a former stock plan administrator. When it comes to taxes, I usually refer receipients to Turbotaxes' article for the fundamentals https://turbotax.intuit.com/tax-tips/in ... /L3K0l47J2 I'm not a tax specialist.

Regarding the zero basis, that seems very unusual for an ISO. Options for founders are typically greater than $0.01 because it should have some fair market value. Zero basis in my experience typically indicate that it is a restricted stock grant and when vested, the transaction is processed through payroll noting that it is a taxable earning and all of the associated employer and employee taxes processed. This would ultimately be reflected on the W2.
Topic Author
Leesbro63
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Re: Tax Reporting of Stock Options

Post by Leesbro63 »

McDougal wrote: Sun Jan 22, 2023 11:25 am Is the code DD in Box 14 or box 12?
Box 14, as I stated in the original post.
shess
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Re: Tax Reporting of Stock Options

Post by shess »

GeMoney wrote: Sun Jan 22, 2023 12:03 pm I'm a former stock plan administrator. When it comes to taxes, I usually refer receipients to Turbotaxes' article for the fundamentals https://turbotax.intuit.com/tax-tips/in ... /L3K0l47J2 I'm not a tax specialist.

Regarding the zero basis, that seems very unusual for an ISO. Options for founders are typically greater than $0.01 because it should have some fair market value. Zero basis in my experience typically indicate that it is a restricted stock grant and when vested, the transaction is processed through payroll noting that it is a taxable earning and all of the associated employer and employee taxes processed. This would ultimately be reflected on the W2.
I routinely received 1099-B forms reporting $0 basis for same-day sales of vesting shares. In fact, I think they always reported them that way. So you had to make sure you reported the adjusted basis and keep records on the vesting information. I keep the W2 (of course), the 1099-B (of course), and also the confirmation data for the vest/sale, which included the fair-market-value of the vest and the sale price. In the end, you want vesting data which sums up to the additional amount on the W2, and sales data which matches the 1099-B forms.

The only time I had a problem was one year I had multiple very similar vests from multiple refreshers, and a couple didn't make it onto Schedule D. The IRS sent me an inquiry asking me to pay a tax bill based on $0 basis for the missing items, I sent back a cover letter explaining the situation and matching up the numbers on the copies of records I also had, and later got an updated request for $0 additional payment.

In case it's not obvious from current status changes happening to many employees in tech, you really should pull down copies of these docs for your own reliable storage. If/When you leave employment, you are very likely to either forget how to login to your account, or lose access entirely, or they'll rewrite the entire thing while you weren't looking and you'll no longer have access to the internal documentation on how to work the new system. Get those docs into PDFs and store them in Google Drive or similar.
ejm009
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Re: Tax Reporting of Stock Options

Post by ejm009 »

Employee stock plans is the only instance I am aware of that justifies paying for the Premier version of TurboTax. It is very easy to directly use the brokerage 1099-B numbers which can result in double taxation on ESPP and options. The question and answer section of TT Premier is helpful in this regard.
ivgrivchuck
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Re: Tax Reporting of Stock Options

Post by ivgrivchuck »

Leesbro63 wrote: Sun Jan 22, 2023 8:22 am I don't expect a full tutorial on a Bogleheads thread for this, but perhaps one of the tax people can give me and overview and point me to some easy-to-grasp sources. I'm a pretty good amateur at this, but I'm not a CPA.
I'm not a tax expert, but I've reported stuff like this in my tax return a couple of times.

The first step is to determine what type of options these are:
1. NSOs
2. ISOs

NSOs are simpler (but less favorable). ISOs have more complexities (but potentially more favorable). In any case the key for me was to keep good records (I used a spreadsheet) of each transaction, like:

Exercise:
- Original grant date
- Date of exercise
- How many shares
- Exercise price per share
- Fair market value at exercise per share

Sell:
- Date of disposition
- How many shares
- Cost basis (adjusted) per share
- Original grant date
- Original exercise date

Depending on the option type, you might want to read:
NSOs: https://turbotax.intuit.com/tax-tips/in ... /L8zsxRi7B
ISOs: https://turbotax.intuit.com/tax-tips/in ... /L4azWgfwy

And then post here for more questions.

Edit: Slightly modified the post after submitting.
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howard71
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Re: Tax Reporting of Stock Options

Post by howard71 »

Leesbro63 wrote: Sun Jan 22, 2023 11:13 am
howard71 wrote: Sun Jan 22, 2023 9:03 am Sounds to me like the proceeds of the sale were already taxed as ordinary income.

So don't make the same mistake I did years ago and assume you don't have to do anything else. If things still work the way they did back then, the brokerage transaction was reported to the IRS and needs to be accounted for with a schedule C (if memory serves me right) showing no gain on the transaction.

I got a shocking letter from the IRS when I failed to do this, informing me I owed them about $25k. Didn't have to pay it but it took me a while to figure it out and submit the schedule C.
Do you mean Schedule D? I think you’re onto something but what to do is still fuzzy.
Yes, I probably meant schedule D.

You have to account for the brokerage transaction in selling the stock because the IRS already has that info on a 1099. I filed one with zero profit on the sale and that took care of the problem with the IRS.
Topic Author
Leesbro63
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Re: Tax Reporting of Stock Options

Post by Leesbro63 »

Update from the Original Poster (me): I now learn that the sold shares were transferred to and sold out of an ETrade account. So I assume that about mid February there will be a Form 1099-B. I suspect from what has been posted here, I'll be able to figure this out. Thank you all for helping me here.
lstone19
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Re: Tax Reporting of Stock Options

Post by lstone19 »

Leesbro63 wrote: Sun Jan 22, 2023 12:21 pm
McDougal wrote: Sun Jan 22, 2023 11:25 am Is the code DD in Box 14 or box 12?
Box 14, as I stated in the original post.
Box 14 is an information box which does not have codes (there is a code DD for box 12 but that's for cost of employer-sponsored health coverage). DD is probably an abbreviation for "disqualifying disposition" as an immediate sale of option stock would be a disqualifying disposition. Box 14 does not flow on its own to any particular place on your tax return (my wife's W-2 has an ESPP disqualifying disposition amount in box 14 and TT does not do anything with it - it is up to us to account for it when reporting the stock sale).
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