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

Marilyn Renninger
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.

How To Report Sales Of Company Stock On Your Tax Return

The myStockOptions.com Tax Team
UPDATED FOR 2012! Learn how to report your sales of stock on the new Form 8949 and revised Schedule D of IRS Form 1040.

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NEW! What are the big changes with reporting stock sales this year on my tax return? Why have these changes occurred?

For people who sold shares in 2011, major changes in tax reporting and filing are taking effect this tax season...

NEW! How is IRS Form 1099-B changing for sales of stock acquired from my stock options, restricted stock, or ESPP?

More information is now reported on this form than in past years. This may prove to be more helpful, but it also may be more confusing. Issued to you by your brokerage firm, IRS Form 1099-B is an important document that you must have to complete your tax return. Recent legislation has changed the form in significant ways that you must understand...

NEW! What if the wrong cost basis is reported on my 1099-B? How do I report the right cost basis on Form 8949 of my tax return?

The new Form 8949 is where you now list the details of each stock sale on your tax return, while the revised Schedule D is where you now merely aggregate the column totals from Form 8949 to report your total long-term and short-term gains and losses. From our interpretation of the forms and their instructions, myStockOptions.com recommends the following reporting steps to avoid overpaying taxes...

Do I need to sell my shares at exercise?

The exercise and the sale are separate. Whether you sell the shares at the time you exercise stock options depends on various factors. At exercise, you can usually...

Do I need to sell my shares at the vesting of restricted stock, RSUs, or performance shares?

The vesting of restricted stock, RSUs, or performance shares is separate from the sale of the shares. Whether you sell the shares at vesting depends on various factors, including...

How do I sell shares that I acquired 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...

UPDATED! 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...

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...

Form 8949 and Sch. D diagrams! Is the brokerage commission taxed?

The commission either reduced the sale proceeds or was reported...

How is capital gain calculated?

The amount of your capital gain is the difference between your sales price and your tax basis in the stock. However, with stock from equity compensation, your tax basis can be harder to determine. It is...

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...

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

Your broker will periodically send you transaction statements...

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...

What tax statement will I receive from my broker after a sale of company stock I acquired by stock option exercise, restricted stock vesting, or ESPP purchase?

You will need to gather certain information to complete your tax return. The broker will send you IRS Form 1099-B for the proceeds...

Do I always get a Form 1099-B for a same-day-sale cashless exercise? Are there exceptions, and if so how do I report the sale on my tax return?

You should almost always receive Form 1099-B. The only exception occurs if certain requirements under IRS Rev. Proc. 2002-50 are met. This revenue procedure allows...

UPDATED! If my company requires me to have a foreign bank or brokerage account because of the stock plan, does this require any special filings with the IRS?

Perhaps, depending on the structure of the plan. The IRS wants to know about foreign accounts of US taxpayers to be sure taxes are paid on any earnings. Any "US person" with a financial interest...

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, most companies adopt rules that stop all employees from trading during certain periods. This means that...

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...

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...

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