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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

The myStockOptions.com Tax Team
UPDATED FOR 2010! 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.

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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...

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...

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...

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

You will need to gather certain information to complete Schedule D of your tax return. The broker will send you a Form 1099-B for the proceeds that you use to...

Is my broker required to give me a Form 1099-B when I make a same-day-sale cashless exercise? Are there any exceptions?

Yes, except when certain requirements under IRS Rev. Proc. 2002-50 are met. This revenue procedure allows...

NEW! 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...

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?

For various reasons, clawbacks are becoming more common. According to surveys of proxy statements and other sources, 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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