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Hello,
I am hoping someone might know what to do in this situation or had a similar situation. Here are the facts:

Some company incentive stock options were excercised and then immediately sold the same day.

The company's HR dept said that the net profit was reported on the W2 as part of that year's salary and that taxes were already withheld and paid to the IRS.

The brokerage firm that the company used sent the employee of the stock option transaction a 1099-B for that same transaction that already appeared on the employee's W2 as part of gross salary. This 1099-B was reported by the brokerage to the IRS, so the statement says.

Question:
What should the employee do in this case as it was already reported as part of gross salary and income taxes taken out already. Yet, the fact that a 1099-B was received implies that you should report it on the 1040. However, doing so would subject that amount to double taxation.
Was it a mistake to receive the 1099-B? Should the employee just ignore it and assume no issue will result? Or, is there some other form to fill out that will right this all out?
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Do you have access to the actual numbers to confirm the double reporting? There's two parts to a same-day-sale ISO exercise:

1. The ISO is exercised - this generates ordinary income in the amount of shares x (market price - strike price). This goes on the W2

2. The shares are sold, which generates short term gain (or loss) in the amount of shares x (market price - acquisition price). Acquisition price is the market price from step 1. This generates a 1099-B.

The market price in steps 1 and 2 is almost never the same. The steps don't happen simultaneously, in my experience, so the prices change. It might also be an issue of market spread.

The summary you get from the brokerage handling the options should show the various numbers.
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Add the amount reported on your W-2 to your cost basis.
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Some company incentive stock options were excercised and then immediately sold the same day.

It may help if you look at this as two separate transactions. First the employee exercises some options to buy company stock at a certain price. The difference between the market price of the stock and the price paid is the bargain element, which is taxable wages to the employee. If the employee provided cash to pay for the stock and the tax required to be withheld our story would end here and be fully reflected on the W-2.

But who's kidding who? The employee doesn't have the cash, so the employee funds the purchase by immediately selling all (usually) or some of the just-acquired stock. Thus the "same-day" sale. You sell stock, you get a 1099-B. You get a 1099-B, you report it on Schedule D. This is no different than any other sale of stock. Add the amount treated as wages to the option price and you get the basis in the stock sold. When the dust settles on Schedule D, where this winds up, there will be a small short-term loss equal to the broker's fees.

At the time of the same-day sale the broker issues an accounting of all the numbers and what cash went where. The employee can then check YTD numbers on the paystub to make sure everything made it properly into the payroll system. This accounting has variations of "Important! You'll need this! Guard with your life" plastered all over it.

See "Who's kidding who?" above.

Phil
Rule Your Retirement Home Fool
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Thanks for the input....need to wrap the head around this one.

First item of confusion is that if the net proceeds/profit is added to the cost basis, it may not be the same number as the " cost basis " reported by the 1099-B to the IRS...which might be a problem.

Also, the W2 is not itemized to reflect what that exact number was that was part of the gross salary, though it might be found upon getting copies of all paystubs and digging a little further.

Last item of confusion is if the net proceeds/profit reported on the W2 is added to the "options price" it won't be a per share price as its a total figure. Do you just manually figure it out and divide by the number of shares involved?

The software being used to prepare the tax return is TurboTax Home and Business. It has its own prompts, but I am thinking that it may need to be overridden to get this sorted out on the Sch D.
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Also, the W2 is not itemized to reflect what that exact number was that was part of the gross salary, though it might be found upon getting copies of all paystubs and digging a little further.

Box 1 of the W-2 isn't itemized, but have you checked all of the details?

It has been a few years, but I remember that the amount was listed on my W-2.

Cost basis being incorrect is not that unusual. Turbo Tax should handle it without having to override Schedule D.
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Let me take a stab at the explanation. You have two transactions in a same-day option sale.

First, you exercised the stock options. The options have an exercise price which you need to pay to buy the stock. I know you didn't write a check, but had you not done a same day sale, you would have to actually pay the option price. In a same day sale, the broker lends you the option price. So you bought the stock at a discounted price.

Now because these options were given to you in exchange for your services as an employee, the inherent gain on the day you exercise them is considered to be wages. That gain is the difference between the exercise price and the fair market value of the stock. You have to pick that up as income. And because you have to record that income without actually receiving money, you increase your basis in the shares of stock by the amount of income - income you didn't actually receive in cash. Instead, you received income by getting stock that is worth more than you paid for it.

That last paragraph is the critical part you have to grasp to understand the taxation of employer stock options. In a way, you get paid in shares of stock instead of cash.

If we stopped here, you would have to write a check to your employer for the exercise price of the stock. AND you'd have to write another check to pay all of the usual paycheck withholding taxes on the stock you just received. Not many people want to do that. So next we sell the stock.

Now that you own the stock, you are free to sell it. And since you still technically owe your employer for both the exercise price and the withholding taxes, you need to raise some cash. Selling the stock you just received is a great way to do that. This is the second transaction.

This is really a pretty ordinary stock sale. You sell the stock you now own and use the proceeds to pay the option price and withholding taxes you owe. These are less than the total proceeds of the sale, so you get whatever is left in cash. Just like any other stock sale, you have to report your gain or loss on the sale on your tax return.

You know your selling price - that's on the 1099-B you received. You also paid some fees to sell the stock. Some brokers net that out of the selling price before reporting the 1099-B and some don't. You'll need to take a closer look at the paperwork you received at the time the stock was sold to figure that out.

And you know your cost basis. That's in the third paragraph of this post. As a refresher, its the option price plus the income you have to report.

The difference between your selling price and your cost is your gain or loss on the sale of the stock. In a same day sale of an option exercise, that will be a small amount. Often, its a loss because of the selling fees, although sometimes the stock is sold in the open market at something other than it's average price for the day (which is what your employer used to figure the FMV of the stock). So it's possible to have some larger gain or loss on the sale.

That covers the same day option exercise and sale. Now for some pontificating.

At the time you exercised the options, you received a bunch of paperwork explaining all of this. The explanations are not always great, but you received them. And in that paperwork is the detailed numbers for your specific transaction. You need those numbers to make sure the math was done correctly for your transaction and to prepare your taxes.

If you don't have them carefully filed away, go talk to your benefits people at work. They will heave a great sigh, mutter under their breath about how no one pays attention to anything but the check they got, then set about making copies for you. Do not insult them by claiming you didn't receive the paperwork, because you did. You just didn't care at the time. Thank them for their efforts.

As to per-share numbers - you don't need them and you don't care about them for taxes. You just need to deal in dollars. You bought a bunch of stock for, say $10,000. You had to recognize $2,000 of income from the discounted purchase price. You sold the bunch of stock for $11,997. You have a loss on the sale of $3. That's all you need to know. It doesn't matter whether that was 1 share or 100 shares or 1 million shares. Just look at the dollars.

--Peter
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First item of confusion is that if the net proceeds/profit is added to the cost basis, it may not be the same number as the " cost basis " reported by the 1099-B to the IRS...which might be a problem.

Also, the W2 is not itemized to reflect what that exact number was that was part of the gross salary, though it might be found upon getting copies of all paystubs and digging a little further.

Last item of confusion is if the net proceeds/profit reported on the W2 is added to the "options price" it won't be a per share price as its a total figure. Do you just manually figure it out and divide by the number of shares involved?


The wage income from the transaction is included in Box 1 of the W-2. It is also separately stated in Box 14 with a code V.

You're confused because you insist on thinking about net proceeds. This number is totally useless when completing the Schedule D entries. Go back and read again what you've been told about how to figure basis.

Phil
Rule Your Retirement Home Fool
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Thanks everyone for the clarifications, much appreciated. Should be able to do the correct reporting on the tax return now.

Will return to this post if have any other questions, and again thanks for responding to this thread.
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