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Stock Option Fundamentals (Part 3): Income Taxes And Withholding

Marilyn Renninger
UPDATED! Here's some advice for financial fitness: take stock of taxes before you exercise! When and how you exercise your stock options can have a major impact on how much tax and which taxes you'll pay.

Reporting Company Stock Sales

The myStockOptions.com Tax Team
UPDATED! Learn how to report your sales of company stock on Schedule D of IRS Form 1040. Our comprehensive guide to Schedule D reporting covers sales of stock from nonqualified stock options, incentive stock options, restricted stock, restricted stock units, employee stock purchase plans, and stock appreciation rights.

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FAQs (Jump to articles)

How do I sell shares that I acquire through a stock option exercise, restricted stock vesting, or ESPP?

Whether you hold stock certificates, hold your shares in a brokerage account, or have an online trading account, you will need the assistance of a stockbroker...

Why does my company appoint several brokerage firms or transfer agents for me to use when I exercise my options, or for the deposit of my restricted stock and ESPP stock?

Your company uses one or more "captive" brokerage firms or a transfer agent for...

Must I use a company-approved broker to sell shares?

Not necessarily. If you exercised your option with a company-approved or "captive" broker...

What are the different types of sell orders I can place with my option exercise?

You can place four types of sell orders, depending on your brokerage firm and company rules...

Why did the brokerage firm that my company requires me to use for option exercises hold the sales proceeds and stock in my account and not send me a check?

The default method for the distribution of sales proceeds in a cashless exercise is holding them in an account at the brokerage firm...

Who pays the brokerage sales commission?

While you rarely pay commission for the option exercise or ESPP purchase, you owe it when you...

Schedule D diagram! Is the brokerage commission taxed?

No. It reduces the sale proceeds you report on...

What happens if I have a capital gain from one sale of company stock and a capital loss from another sale of company stock or another security?

The treatment for tax-loss harvesting is similar to that of owning and selling any two stocks. The income-tax reporting for multiple transactions is...

Does the lower long-term capital gains rate apply to stock sales on or after May 6, 2003, even though the option was granted, vested, or exercised before that date?

Yes. Any stock held for one year and sold on or after May 6, 2003...

When do I receive the sales proceeds, and how will I know the amount?

Your broker will periodically send you transaction statements...

How will my broker know which shares to sell? Should I identify them in some way?

If you have more than one batch of company stock, you are responsible for providing your broker with enough information to identify which shares to sell. If you do not specify...

If my company or a third party buys my employee stock options for cash, how is this taxed?

You recognize ordinary income for the full value of the cash payment. Any deferred portion of the cash sale proceeds is not taxable until...

What is a "wash sale"?

If you sell company shares for a loss and buy more company shares within 30 calendar days before or after the loss transaction, the federal tax code will...

Can I still make a "deemed sale" to reduce my total taxes on the eventual sale of my company stock?

A deemed sale is a technique that allowed you to take advantage of the lower capital-gains rate...

What tax statement will I receive from my broker after a sale of company stock I acquired by exercising stock options?

For a cashless exercise/same-day sale, the broker sends the optionholder a 1099-B for the gross proceeds of the sale...

Is my broker required to give me a Form 1099-B when I do a cashless, same-day sale exercise?

For same-day cashless exercises the IRS, in a revenue procedure of mid-2002, now allows...

How does a "clawback" work to take away stock grant gains?

A clawback is triggered when you leave to work for a direct competitor or engage in...

How common are clawback provisions?

The exact percentage of companies that use clawbacks is...

What are "blackout periods" and "window periods"?

Blackout periods are times when you are prohibited from trading your company's securities, and window periods are times when you are allowed to trade. Some companies also prohibit...

How do blackout periods affect my ability to sell shares?

To prevent insider trading, and to reduce the need to constantly monitor and evaluate...

Can I sell my company stock through a blind trust, or another type of trust, as a defense against insider trading?

Using a blind trust goes beyond the protections of Rule 10b5-1 plans, yet has more restrictions. These are irrevocable grantor trusts with...

Can proceeds from stock options be garnished to pay a creditor, an ex-spouse, or a tax authority?

"Garnishment" is a legal process in which a debtor pays an obligation with property and/or goods that are owed to or belong to the debtor but are in the hands of a third party. Whether this remedy applies to stock options depends...

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