NQSOs: Taxes Advanced

How Tax Rate Changes Impact Your Stock Grant Strategies (Part 1): Nonqualified Stock Options

Stanley Trotta with Robert Gordon
For now, it appears we have dodged a tax-increase bullet. However, President Obama's proposals will probably raise taxes after 2010. Should you take action with stock options now or wait until new rates apply? Part 1 looks at nonqualified stock options.

Stockbrokers' Secrets (Part 3): Year-End Planning For NQSOs, Restricted Stock, And RSUs

W.E.B. Bantling and Michael Beriss
UPDATED FOR 2009! The time for tax planning is before the year ends; tax season is too late. For year-end 2009, learn about several ideas that apply to nonqualified stock options (NQSOs) and restricted stock/RSUs. Meanwhile, look ahead at the likelihood of tax rate changes under President Obama.

Stock Option Financial Planning After Your Tax Return Is Filed And At Year-End (Part 1)

Tom Davison and Liam Hurley
Right after you have completed your taxes is a great time to do your big-picture financial planning. You can more accurately project your income and likely tax situation for the remainder of this year and the next, including AMT risk and capital-loss carry-forwards, to develop your strategy. At the end of the year, review your analysis and strategy again.

How To Report Sales Of Company Stock

The myStockOptions.com Tax Team
UPDATED FOR 2009! 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, performance shares, employee stock purchase plans, and stock appreciation rights.

Avoid Tax Return Mistakes With Stock Options & ESPPs: What You Need To Know In 2009

Bruce Brumberg and Lynnette Khalfani
Tax returns can be onerous. Read this article if you are puzzled by Form 1099-B or don't know how and where to report sales of company stock from options or employee stock purchase plans.

Taking An Overseas Assignment: Stock Compensation For Mobile Employees (Part 1)

Mark Miller
UPDATED! For employees and executives, international travel and relocation are increasingly common. The taxation of "mobile employees" is always complex, and never more than with equity compensation. Part 1 introduces the key concepts and rules, including the sourcing and apportioning of income.

Taking An Overseas Assignment: Stock Compensation For Mobile Employees (Part 2)

Mark Miller
International assignments or relocations can present attractive opportunities for career advancement. However, the taxation of equity compensation for mobile employees raises complex issues. Part 2 looks at specific scenarios, withholding taxes, and tax equalization.

How The Bush Tax Cuts Still Affect Your Stock Option Planning

Tom Davison
Even under President Barack Obama, the Bush administration's 2003 tax cuts and later extensions will continue to affect tax strategies for NQSOs, ISOs, and restricted stock. Unless these tax laws change soon, many of them will persist through 2010.

IRS And Treasury Warn Against Frivolous Tax Arguments Surrounding Stock Options

IRS and US Department of the Treasury
The Treasury and IRS have warned taxpayers against several frivolous arguments you should not make on tax returns. The IRS has been aggressively pursuing and winning court cases against such arguments.

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FAQ Table of Contents:

Withholding

W-2s & Tax Returns

Netting Gains and Losses

Advanced

Withholding

May I have my employer withhold more taxes upon my exercise of an NQSO than the minimum required amount?

Whether you can withhold more or not, the mandatory federal withholding rate...

After I exercise NQSOs, will I need to make estimated tax payments?

At a minimum, when you exercise your stock options, your company will withhold taxes at the required federal withholding rate for supplemental income. However, depending on your income, this minimum withholding may not be enough. If so, you will need to...

How is fair market value determined for W-2 reporting of NQSO taxable income at exercise and for tax withholding?

To calculate the taxable income at exercise, your company subtracts your exercise price from the fair market value (FMV) of the stock at exercise. Approaches to this FMV calculation depend on...

My new company withheld Social Security tax from my wages even though I "maxed out" on these taxes this year from my stock option exercise and restricted stock vesting at my prior employer. Can I get a refund or a credit on my tax return?

When you have more than one job in a year, each company must withhold Social Security tax without considering what the other company withholds. The result could be...

Are the tax rules, withholding, and tax return reporting for NQSOs different if I am an independent contractor, consultant, or outside director and not an employee?

In some ways they are similar, though different if you were an employee at the time of grant. The tax treatment of NQSOs is...

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W-2s & Tax Returns

How do I report the income that results from the exercise of a nonqualified stock option on my federal income-tax return?

The full spread is included in your gross income for the year of exercise and is taxed in the same way that your...

What are the biggest mistakes related to stock options I can make on my tax return, and how can I avoid them?

It is easy to make mistakes that lead to paying more tax than you need to, or that may even prompt a review by the IRS. For example, with a cashless exercise/same-day sale, even though you never owned the stock after exercise, you still must...

W-2 diagram! What will my W-2 show after I exercise nonqualified stock options?

The gain from your nonqualified stock option exercise(s) is totaled on the W-2 with other income in the following boxes...

Schedule D diagram! How do I report a sale of nonqualified stock options on my federal income-tax return?

You need to complete a Schedule D, Capital Gains and Losses, for the year of the sale of your stock and...

Schedule D diagram! I did a cashless exercise with my nonqualified stock options last year. Do I need to show the transaction on Schedule D of my Form 1040 tax return, or can I ignore the broker's statement (1099-B) since there are no gains or losses to report?

You should still file Schedule D, which is used to report capital gains and losses...

I received a notice (CP-2000) from the IRS stating that, according to last year's tax return, I owe money for the cashless exercise of my stock options. I thought I paid all the taxes through withholding at exercise. How do I reply?

You made this mistake because the stock sale at exercise does not generate any gains. The full spread between your exercise and sale prices was added to your W-2, and taxes were withheld at exercise, so you thought you did not need to report the sale on Schedule D of your Form 1040. However...

I acquired stock from exercises and restricted stock vesting a few years ago. When I sell the stock, how do I rediscover the cost basis for Schedule D of my tax return?

Let's first review the tax rules and the W-2 reporting. The tax basis for...

Schedule D diagram! I exercised NQSOs, held the stock, and now have long-term capital gains on the sale. Do I get any "credit" on my tax return for the income tax I paid for the spread at exercise?

This differs from the situation with ISOs in which your exercise-and-hold triggers AMT and you then have a tax credit...

In what ways can I pay my taxes if I don't have the money to pay them with my tax return?

Apart from applying for an extension, which delays only the filing of your tax return, not the actual payment, you have a few choices...

When I file an extension to complete my tax return after the IRS deadline, are there any mistakes I should avoid that involve stock grant income?

Stock compensation income can raise your income tax and make your tax return complex. The IRS has a form that lets you apply for an automatic six-month extension for the due date of your tax return (until mid-October). Mistakes include not paying taxes owed with...

UPDATED! Can stock grant income affect my eligibility for the Making Work Pay Credit in 2009 and 2010?

Yes. The credit has income limits, so a big enough spike in your income from a stock compensation could push you out of the credit range or complicate your tax return...

UPDATED! My company's stock is now essentially worthless because of securities fraud by senior executives. Can I claim a casualty or theft loss on my tax return?

A casualty or theft loss would allow you to deduct the lost amount against your ordinary income, subject to some limits. However, Treasury regulations and court rulings would probably stand in your way. Nevertheless, what you can do is...

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Netting Gains and Losses

What happens if I sell the shares for less than the fair market value on the date of exercise of the NQSO?

You have a capital loss for federal income tax purposes...

The spread on my NQSO exercise is reported on my W-2 as ordinary income. Can I use my stock-trading losses to offset this income?

The tax law says that you can offset losses against only the same type of income. This means you cannot use capital losses to offset ordinary income. However...

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...

Are there any stock-option strategies for using my capital-loss carry-forwards?

Tax considerations alone should not drive the choice of what stock you sell. For example, if you are holding appreciated company stock from a nonqualified stock option (NQSO) exercise, you will be taxed on any capital gains when you sell it. The capital-loss carry-forward from last year's unused losses can offset these gains, making it less "taxing" to diversify your holdings...

Do I receive any tax benefits if a capital loss is generated by my sale of NQSO shares?

Yes, the benefits from tax-loss harvesting are the same as those for selling any stock at a loss...

I have both in-the-money and underwater options. If I exercise them all and immediately sell the stock, can I offset the gains with the losses on the underwater options?

This is wishful thinking, because these are two separate transactions. It does not make sense to...

Do I have a tax loss if my NQSOs expire without being exercised?

No. Although you have performed services for the company and your options clearly have economic value...

Both dividends and long-term capital gains are now taxed at the same rate. Can I net my dividends from my company stock against capital loss from the sale of company stock or another security?

No. Under the 2003 tax cut, qualified dividends are taxed at the same rates as long-term capital gains...

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Advanced

Are there financial strategies for NQSOs?

As other FAQs and articles in this section explain, there is no universal plan for everybody. With that said, we present some general advice from experts...

UPDATED FOR 2009! What are some year-end strategies for stock options and restricted stock?

This depends on your financial situation, on whether your decisions should be entirely tax-driven, on what you did earlier in the year, on your outlook for your company's stock price, and on the prospects for changes in tax law during the year ahead. Below we present 10 ideas...

My company's stock price has dropped since I exercised my NQSOs. Is there anything I can do to reduce the taxes I owed on the spread at the time of exercise?

No. Since the spread between the exercise and market price for NQSOs is taxed as ordinary income upon exercise, the tax is fixed on that date...

My company backdated more stock options than just those of the senior executives. How does this affect employees like me and the taxation of my stock grants?

At a minimum, do not expect any new stock option grants with an exercise price lower than the market price on the grant date. The tax treatment varies by type of grant. Some of the companies involved in the controversial backdating of stock options restricted employees from...

If I move to another country to work, will I still have to pay US taxes on option exercises, restricted stock vesting, and stock sales? Can I avoid double taxation?

The United States taxes the worldwide income of US citizens regardless of whether the income arises from activities in the US. In addition, the other country may impose taxes too. But the US has tax treaties with certain nations to help taxpayers avoid double taxation...

What happens if I live in state A when my stock options are granted, state B when I perform some of my services, state C when I exercise the options, and state D when I sell the shares?

Generally, each state you live in determines what income is taxable and when. For administrative ease, many companies...

What is the tax impact on me if my company modifies outstanding stock options or SARs, such as by extending the option term?

With approval from the board, and perhaps also shareholders, your company can modify outstanding grants in a way that is consistent with its stock plan. However, it should avoid tax pitfalls for you and the company, such as...

UPDATED! Does the American Jobs Creation Act, particularly Section 409A on deferred compensation, affect my stock grants?

A number of tax law provisions and interpretations that may affect your stock grants occur in the wide-ranging American Jobs Creation Act (AJCA); the final regulations on deferred compensation under Section 409A, which adopt the...

How do I use stock that I own to exercise an option in a stock swap? What is the tax treatment?

A "stock swap" or "stock for stock" exercise is a stock option exercise in which the exercise price is paid with shares of company stock you own...

What tax treatment applies after ISOs are converted to NQSOs?

ISOs must have certain characteristics, and the grant must follow certain rules in the tax code. Otherwise, the ISOs will be taxed like...

With NQSOs, is there any tax risk after exercise if the market price of my stock substantially rises or drops by the time I pay my taxes?

The tax treatment is fixed at the time you exercise NQSOs, regardless of the future direction of the...

If I sold my stock immediately upon exercise or at vesting, the transaction would violate the insider-trading laws and the laws of short-swing profits under Section 16(b) because I had a purchase within six months of the sale. Would this then delay the date of the tax treatment?

The spread at exercise is what matters for the tax calculation...

If I exercise my NQSO and immediately donate the shares to charity, do I still need to pay the taxes on the spread at exercise?

Yes. The option exercise and the...

What are "discounted" stock options, and how are they taxed?

Stock options are usually granted with an exercise price equal to the fair market value (FMV) of a share of company stock on the grant date of the option. Once it falls below the FMV they become discounted stock options, which raise multiple issues, including...

Does the accelerated vesting of my stock options, restricted stock, and/or performance shares in a change of control or termination have any tax impact on me, such as for ISOs and golden parachute payments?

With stock grants of normal size, you face no tax impact beyond the standard tax treatment. ISOs may be converted to NQSOs should any acceleration of vesting cause...

Is it possible to defer the gains on an NQSO exercise by having the shares delivered in a later tax year?

Under a limited number of stock plans, it used to be possible to defer delivery of shares, and related taxes, to some time after exercise or vesting. However, under Section 409A of the American Jobs Creation Act of 2004 (AJCA), this type of deferred compensation is...

Will my company be able to take a tax deduction for the value of my restricted stock, restricted stock units, performance shares, or stock options if my compensation already exceeds $1 million?

This depends on what triggers vesting. Section 162(m) of the tax code limits your company's deduction to $1 million unless a senior officer's compensation over this amount meets the performance-based exception. Stock grants are structured to meet this by...

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