Frequently Asked Tax Questions And Answers
Keyword: Stock Options
10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
Do I report the buying of stock?
Ordinarily, you do not have to report the purchase of stock, only the sale of stock.
However, if you exercise a nonstatutory stock option, a type of stock option granted
by an employer, you may have income to report in the year of exercise (the excess
of the fair market purchase value of the stock less the exercise price) if your rights
in the stock are substantially vested at the time of exercise, see Publication 525, Taxable
and Nontaxable Income, for further information.
References:
How do I report incentive stock options on my tax return?
If your option is an incentive stock option, you do not include any amount in your
gross income at the time the option is granted, or at the time you exercise it. However,
you may have income for Alternative Minimum Tax in the year you exercise the option.
If the special holding periods requirements are met, any income or loss from the
sale of the stock is treated as a capital gain or loss. However, if you do not meet
the special holding period requirements, you may have compensation income when you
sell the stock. For further information, refer to Publication 525, Taxable
and Nontaxable Income and Form 6251 (PDF), Alternative
Minimum Tax-Individuals.
References:
How do I report a nonstatutory stock option on my tax return?
Generally, if you have a nonstatutory option, you do not include any amount in
income on the date of grant. (or otherwise dispose of) the nonstatutory option in
an amount equal to the FMV of the stock less the exercise price. However, if you have
nonstatutory option with a readily ascertainable FMV, different rules apply. See Publication 525, Taxable and Nontaxable Income.
References:
I received an incentive stock option from my company, is this taxable?
If your option is an incentive stock option, you do not include any amount in your
gross income at the time the option is granted, or at the time you exercise it. However,
you may have income for Alternative Minimum Tax in the year you exercise the option.
If the special holding period requirements are met, income or loss from the sale of
the stock is treated as a capital gain or loss. However, if you do not meet the special
holding period requirements, you may have compensation income. For further information,
refer to Publication 525, Taxable and Nontaxable Income
References:
I purchased stock from my employer under an employee stock purchase plan.
Now I have received a From 1099-B from selling it. How do I report this?
If the special holding periods are met, generally treat gain or loss from the sale
of the stock as capital gain or loss. However, you may have compensation income if:
The option price of the stock was below the stock's fair market value at the time
the option was granted, or
You did not meet the holding period requirement.
The holding period requirement is that you must hold the stock for more than 2
years from the time the stock is granted to you and for more than 1 year from when
the stock was transferred to you. If you do not meet these holding period requirements,
there is a disqualifying disposition of the option. The compensation income that you
should report in the year of the disposition is the excess of the fair market value
of the fair market of the stock on the date the stock was transferred to you less
the amount paid for the shares.
If the holding period requirement is met, but the option price is below the fair
market value of the stock at the time the option was granted, you report the difference
as compensation income (wages) when you sell the stock. Generally, this compensation
income is the lesser of the excess of the fair market value on the date of the disposition
less the exercise price OR the excess of the fair market value of the option when
granted less the exercise price.
If your gain is more than the amount you report as compensation income, the remainder
is a capital gain reported on Form 1040, Schedule D (PDF).
If you sell the stock for less than the amount you paid for it, your
loss is a capital loss, and you do not have ordinary income.
For more information, refer to Publication 525, Taxable and
Nontaxable Income, and Publication 551, Basis of Assets.
References:
Where on the tax return do I enter the compensation income I had from the
sale of stock that I purchased under my employer's stock purchase program?
The compensation income is reported on line 7 (wages, salaries, tips, etc.) of
Form 1040. It is added to the stock's basis used when determining capital gain or
loss on the sale of the stock. Any capital gain or loss on the stock sale is reported
on Form 1040, Schedule D (PDF), Capital Gains and
Losses.
References:
Is the Internal Revenue Code limit of $25,000 per calendar year for stock
bought through an employee stock purchase program (ESPP) based on the discounted purchase
price or the higher stock value?
Under the terms of an employee stock purchase plan, you cannot accrue the right
to purchase more than $25,000 of stock, valued at fair market value on the day the
option is granted, in any one calendar year. The limit is not based on the purchase
price.
References:
- Internal Revenue Code section 423 (b)(8)
Are incentive stock options subject to alternative minimum tax, and if so,
how do I determine the basis for the stock?
A taxpayer generally must include in alternative minimum taxable income the amount
by which the price paid for stock received pursuant to the exercise of an incentive
stock option is exceeded by the stock's fair market value at the time his rights the
stock are freely transferable or are not subject to a substantial risk of forfeiture.
Increase your alternative minimum tax basis by the amount of the adjustment. Your
basis for regular tax is not affected by the adjustment.
If a taxpayer acquires stock pursuant to the exercise of an incentive stock option
and disposes of the stock in a disqualifying disposition in the same taxable year,
the transaction is subject to regular tax, and the alternative minimum tax does not
apply. Refer to Internal Revenue Code 83, Internal Revenue Code 56(b)(3), and Internal
Revenue Code 422(c)(2). For more information, refer to
Instructions for Form 6251, Alternative Minimum Tax- Individuals.
References:
-
Instructions for Form 6251, Alternative Minimum
Tax- Individuals
- Internal Revenue Code 83
- Internal Revenue Code 56(b)(3)
- Internal Revenue Code 422(c)(2)
I purchased stock through an employee stock purchase plan at my work which
split three months later. Three months after that, I sold the stock at a gain. How
does the split affect how I report the stock sale on my tax return?
With either of the two types of statutory employee stock option plans, there is
no income as a result of the granting of the option or the exercising of the option
(purchasing stock). These two types of plans are the employee stock purchase plan
and the incentive stock option plan. However, if you don't hold the stock long enough
to meet the holding period requirements, when the stock is sold you may have to report
compensation income (wages). The split will affect the computation of capital gain
and compensation income, if any.
For the stock purchased under an employee stock purchase plan to receive favorable
tax treatment, it must be held for at least two years after the stock is granted and
at least one year after the stock is transferred to you. If the holding periods are
not met, the lesser of the fair market value of the stock on the grant date minus
the option price or the fair market value on the sale date minus the amount you paid
for the stock is compensation income (wages). To the extent that the gain is being
taxed as wages on your return, it becomes part of your adjusted basis in the stock
sold. When determining basis, the amount you paid for the stock is divided equally
among the shares received in the split.
For information on incentive stock option plans and nonstatutory stock options,
or more information on employee stock purchase plans, refer to Publication 525, Taxable
and Nontaxable Income
References:
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