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In 2000, DH worked for a start-up company that gave him ISO options. He chose to exercise the options before they had vested. He put in about $2800. In early 2002, the company went under and that $2800 went with it. It seems like we should be able to take it as an investment loss for 2002 as it's under the $3K limit; however, TurboTax isn't giving me any guidance with this. Ideas?

DH got about 1400 options from another company at a penny per share. He surrendered some shares to cover the tax, and ended up with only 90 shares. Those 90 shares vested in 2002. How do we deal with this on our return?

Thanks!

--AF
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Is there no one who has insight on situations like this? Curious....

--AF
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In 2000, DH worked for a start-up company that gave him ISO options. He chose to exercise the options before they had vested. He put in about $2800. In early 2002, the company went under and that $2800 went with it. It seems like we should be able to take it as an investment loss for 2002 as it's under the $3K limit; however, TurboTax isn't giving me any guidance with this. Ideas?

Depends on what you mean by "went under"? Is this a public company? Did they declare bankruptcy? If it fits the definition of a worthless stock, then you've got a capital loss.

DH got about 1400 options from another company at a penny per share.

How did he get these? Did he buy them? Were they given to him? Does that company have a stock option plan?

He surrendered some shares to cover the tax, and ended up with only 90 shares.

What do you mean by surrender? What happened?

Those 90 shares vested in 2002. How do we deal with this on our return?

A bit more info will be helpful.

--Peter
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In 2000, DH worked for a start-up company that gave him ISO options. He chose to exercise the options before they had vested. He put in about $2800. In early 2002, the company went under and that $2800 went with it. It seems like we should be able to take it as an investment loss for 2002 as it's under the $3K limit; however, TurboTax isn't giving me any guidance with this. Ideas?

My reply
The rules for ISOs prevent the taxation of the option as income at the time the option is granted or when the employee exercises the option. The taxable event occurs when the stock is sold. In this case you will have a $2800 capital loss assuming the stock is completly worthless.



DH got about 1400 options from another company at a penny per share. He surrendered some shares to cover the tax, and ended up with only 90 shares. Those 90 shares vested in 2002. How do we deal with this on our return?

I need more information to answer.
What kind of options?
How much did he pay?
What was he taxed on?

Bill
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DH got about 1400 options from another company at a penny per share.

How did he get these? Did he buy them? Were they given to him? Does that company have a stock option plan?


They were options that he bought for 1 penny per share. No, the company does not have a stock option plan.

He surrendered some shares to cover the tax, and ended up with only 90 shares.

What do you mean by surrender? What happened?


He was given 140 shares. He opted to sell 50 immediately to cover the tax. He ended up with 90 shares. Still, I don't know how to treat this on tax forms.

Those 90 shares vested in 2002. How do we deal with this on our return?

Hopefully this is a bit more enlightening. Thanks for any insight you can share.

--AF
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1. The rules for ISOs prevent the taxation of the option as income at the time the option is granted or when the employee exercises the option. The taxable event occurs when the stock is sold. In this case you will have a $2800 capital loss assuming the stock is completly worthless.

Yes, the stock is completely worthless as the company no longer exists. However, I am not sure where/how to report this $2800 capiltal loss.

2. I need more information to answer.
What kind of options?
How much did he pay?
What was he taxed on?


What kind? I am not sure. He paid 1 cent per share. He was given 140 options but "sold" 50 immediately for tax, thereby leaving him with 90. He still holds these 90 options.

Thanks for any help you can give.

--AF
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He was given 140 shares. He opted to sell 50 immediately to cover the tax. He ended up with 90 shares. Still, I don't know how to treat this on tax forms.

The value of the shares on the date they were given to him should be ordinary income. I think the company needs to report that on his W2. To that amount, add the $1.40 he paid, and you've got your cost basis.

Since he sold 50 shares immediately, I think we've then got a handle on the FMV of the shares as of the grant date. The sale of those shares would have no gain or loss - they were sold for the same price as their basis (or within $0.50, anyway). The remaining shares will generate a capital gain or loss when they are ultimately sold.

--Peter
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I am not sure where/how to report this $2800 capiltal loss.

Schedule D.
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I am not sure where/how to report this $2800 capital loss.

Schedule D.


Using Turbo Tax, a "question" never came up for this particular situation. I may have to go in and fiddle around to see where I can list it.

--AF
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What kind? I am not sure. He paid 1 cent per share. He was given 140 options but "sold" 50 immediately for tax, thereby leaving him with 90. He still holds these 90 options.

It sounds like you are dealing with what are called nonqualified stock options. A nonqualified option is taxed when granted if it has a readily "ascertainable fair market value" at the time of issue.If the option is not actively traded it is not likely to to have "ascertainable fair market value " under the rules. In the case of a nonqualified option that does not have a readily ascertainable market value, the taxable event is when the option is exercised. Ordinary income would be recognized in the amount of the fair market value of the stock purchased less anything paid for the stock or the option. His company should report this income on his W-2.The sale of the 50 shares would go on schedule D. His basis(cost) would be the amount of imcome he recognized for the 50 share plus anything paid for the stock and the option.


Bill
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Thanks!

And... I thought I'd post the answer to the other question here... what to do with stock that became "worthless" during 2002:

http://boards.fool.com/Message.asp?mid=18555216&Posted=18556760&pt=r

--AF
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