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In '97 I exercised some stock options (non-qualified stock option plan) which I had received from my employer. Since I sold the same day as I exercised the options, it was treated as regular income. The gross proceeds were added to my year-to-date income; federal income taxes and FICA taxes were also withheld and their amounts added to year-to-date totals. I received a one-page statement detailing the numbers in the transaction.

My W-2 for '97 includes this option money in the "Wages" amount; however, I also received a 1099-B form which shows the total sales price of the shares, and shows zero federal income tax withheld -- no other amounts.

It seems clear to me that the money was treated as regular income and included in my W-2 amount. What I don't understand, then, is why did I get a 1099-B form to file with my taxes? Can anyone explain how this form is supposed to be used to report the transaction without the IRS considering it additional capital gains income?

I appreciate your help on this.

JJ
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JustaJester,

Think of your stock option exercise as two separate transactions:

1) First, you purchased the shares, and paid taxes on the difference between the option price and the market price. This mean that going forward, your cost basis for these shares will be the market price at the time of exercise, and future gains in the stock price will be treated as capital gains. The gain and taxes paid at the time of the exercise were reported on your W-2.

2) Next, you sold the shares. The cost basis at the time of the sale was the market price at the time you exercised the options, and your broker reported the proceeds of the sale to the IRS, as required. This would be the case whether you sold the shares on the same day, or at a later time - and the sale should be reported on schedule D.

Hope this helps.
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[[In '97 I exercised some stock options (non-qualified stock option plan) which I had received from
my employer. Since I sold the same day as I exercised the options, it was treated as regular
income. The gross proceeds were added to my year-to-date income; federal income taxes and
FICA taxes were also withheld and their amounts added to year-to-date totals. I received a
one-page statement detailing the numbers in the transaction.

My W-2 for '97 includes this option money in the "Wages" amount; however, I also received a
1099-B form which shows the total sales price of the shares, and shows zero federal income tax
withheld -- no other amounts.

It seems clear to me that the money was treated as regular income and included in my W-2 amount.
What I don't understand, then, is why did I get a 1099-B form to file with my taxes? Can anyone
explain how this form is supposed to be used to report the transaction without the IRS considering
it additional capital gains income?]]

KAT in Chicagoland has posted a number of detailed responses on this issue. You might want to go back and read 'em.

But the short answer is that your basis in the shares of stock would be the amount that you paid for them (via exercise) PLUS the amount of income that was included in your W-2 form.

So when you report the stock sale on your Sch D, you'll find that your gain/loss on the sale of the shares will be very small (if there is any at all). But be sure that you DO report the sale of the shares on your Sch D.

TMF Taxes
Roy
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