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Author: mathetes Big red star, 1000 posts Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121340  
Subject: Re: Nonqualified option Date: 4/3/1999 3:32 PM
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I excerised nonqulifid options in 98. Two different option(different option prices) dates 96 & 97. Excercised options and sold stock on the same day. The excercise was handled as a cashless excrecise through securities comp. I recieved ck. from my employer less taxes. I have a letter from my employer showing the price stock was sold for, amount of taxable income to me, tax withheld, and amount of ck. to my employer for the stock purchase price and tax withholding less brokerage commissions. I also have a 1099-b showing total quanity of shares sold ( total of 96&97 options) and total $ amount. How do I determine stock price I paid for shares.....do I take average of two option prices? Having problems on how to fill out Schedule D.

If you'll excuse me a moment of paternal advice here, this question has been asked and answered before, here on this board. You can help us reduce "litter" by using the search function at the bottom of the screen, looking for key words like "options", "nonqualified", etc. Or just set the board to "threaded" and flip through pages for a related topic. You'll generally find what you're looking for faster than the time it takes to pose the question anew.

OK, off the soapbox now. Let's look at your situation.

The W-2 you got from your payroll calculates taxable income based on the difference between the option price and the market price at the time of your exercise. My company uses for market price the average of the day's high and low price; some companies use the day's closing price. The difference is usually small (unless you happen to work for one of the "dot.com" whirlwinds!) Your basis, for Schedule D purposes, is that market price that payroll used in their calculations.

The 1099 should be showing a sales price only, total sale less commissions. You should be able to tell the exact price you got for the shares from that 1099, or from the confirmation you got on the dates of the actual sales.

Your Schedule D will only need to show the gain or, possibly, loss between (a) the market price used by your payroll in figuring the W-2 and (b) the actual price that the broker got. That difference is likely to be a matter of pennies, at most. And it could be a slight gain or a slight loss, depending on the vagaries of the market on that day.

For example: say your option price was $10, the market price for W-2 purposes was 20.50. If you did a 100 shares (to make the math easy) your payroll will have added 100 x 10.50 = $1050.00 dollars to your taxable income, and you should have either paid them or had extra withheld to cover that. If the actual market price at the precise moment of sale was $20.25, then your Schedule D will show a basis of $20.50 (total purchase price of $2050 ) and a sale, at $20.25, proceeds of $2025, for a short term loss of $25. If the actual market price at the precise moment of sale had been $20.75, you'd have a short term gain of $25. [I don't account for any commissions in here; when you do, that can increase the loss or decrease the gain accordingly.]

In short, most of the tax is taken care of with the W-2; the other part is just cleaning up a little litter (if you'll excuse the expression).

What you and I need to appreciate is that though our transactions may be for small numbers of shares, making us wonder "Why bother?" there are top executives who do what you did for thousands and thousands of shares. At, say, 20,000 shares, a short term gain of "only" 50 cents still is a nice chunk of change. That's why the IRS cares about it.

mathetes
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