After all, most of the meter, it means you ’ rhenium becoming affluent and being truly, truly smart about your long-run fiscal plan. 🤓 💵
But, like it or not, exercising stock options does add another layer of complications to your annually tax filing… and if you ’ rhenium not careful, can lead to double-taxation… and the fear IRS tax trap. 😱
fortunately, if you know what to look out for and which IRS forms to pay attention to, you can avoid it.
If you exercised stock options survive year, you will receive a Form 1099B from the brokerage house firm that handles your employee malcolm stock options. A raw regulation issued by the Internal Revenue Service ( IRS ) requires the Form 1099B to show an “ initial ” cost basis for stock certificate options exercised and sold last year .
This initial basis for Incentive Stock Options ( ISO ) and Nonqualified Stock Options ( NQ ) is the price paid for the stock, which is the exercise price ( fall upon monetary value ), under your choice grant .
How Not to Get Double Taxed
To avoid double tax, you must adjust the initial basis by adding any recompense included on your class W2 upon the exercise of the option. On the date of exercise, average income is created for the difference between the strike price and the fair market value per share of your employer ’ second stock if you exercise a nonqualified stock option .
If you exercise an incentive stock choice and do a same day sale, you will create ordinary income for the difference between your hit monetary value and the fairly market value per share. This income is reported on your form W2. If you do not adjust the footing on your tax come back, then you will overstate your capital gains by the sum of malcolm stock choice compensation included on your Form W2. In years prior to 2014, the form 1099B normally reported the right tax basis which included the alteration for any Form W2 income .
Example: Amanda Overstating Her Capital Gain (Don’t be like Amanda.)
For case, Amanda works for a technical school company in San Francisco. She exercised 10,000 nonqualified store options with a fall upon price of $ 11.25 and ordered a same day sale of those 10,000 shares when the stock was worth $ 43.50 per share. Amanda ’ s initial footing is : 10,000 Shares x $ 11.25 Strike Price = $ 112,500 initial Basis Under the fresh regulation, $ 112,500 is what will be reported on shape 1099B as the price basis. additionally, the dispute between the betray price and the hit price of $ 32.25 ( $ 43.50 minus $ 11.25 ) will be reported as taxable income on form W2 .
therefore $ 322,500 ( 10,000 shares x $ 32.25 ) will be taxable income on Form W2. When Amanda reports her capital gain, her selling price is $ 435,000 ( 10,000 shares X $ 43.50 ). Her adjusted footing should be $ 435,000 which includes the initial footing of $ 112,500 plus the W2 income of $ 322,500 .
consequently, her correct capital acquire is zero. If Amanda did not adjust her basis, she could overstate her capital derive by $ 322,500. 😳 In that case, Amanda would pay both ordinary income and capital gain tax on the same money .
The News About Pre-2014 Shares Gets Worse…
Any shares you sold end year that were obtained from the use of lineage options in a year before 2014 may show the adjusted footing.
If you have shares that were exercised and sold death class and shares that were sold last year but exercised in another year, your phase 1099B may show the initial basis for some shares and the adjusted basis for others. Some shares will be reported right and others wrong. If this is you, it ’ second oklahoma to pull your hair forbidden now, but contact us before you do .
There will besides be incompatibility in the price basis report among brokerage firms. Due to differing interpretations of the newly regulations, some brokerage firms may continue to report the adjust footing rather than the initial basis for all employer store options sold in 2014 or late years .
Three Tips to Avoid the Tax Trap
To avoid overpaying your income taxes, you should do the follow .
- Carefully read your form 1099B, which should arrive by mid-February, including supplemental information to understand how the cost basis information was calculated.
- Make an adjustment on Form 8949, column g to correct your basis and assure you do not overstate your capital gain. Form 8949 is filed as part of your form 1040.
- Contact a tax preparer who specializes in stock options
If you sold shares acquired through an employee stock purchase design ( ESPP ) you will besides be impacted by this issue. If any ESPP income was reported on a form W2, you may need to make an adjustment to cost footing in the same manner as discussed above .
No Worries for Restricted Stock Units
Restricted standard units ( RSU ) are not affected by these fresh regulations. The cost basis reported on shape 1099B for an RSU should be the carnival marketplace value per parcel at the date of vest .
Make Sure You Avoid the IRS Tax Trap
We specialize in helping technical school industry professionals with lineage options. Avoiding the tax trap starts with a 15 moment initial call .
A 15 minute call is a fortune better than an hour or more verifying the basis on form 1099B. You have better things to do. As part of our first gear converge, after the predict, we will review all your options with you and verify footing for any stock options sold sol that verifying the accuracy of your 1099B is quick and easy.