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This section lets you communicate with experts at myStockOptions.com. If, after looking at our extensive content and using the interactive tools, you still have questions or seek more guidance, either post your questions in the Discussion Forum on myStockOptions.com (registration is required) or submit them directly to us by using the link at the left. We will try to answer your question privately, and we post selected Q&As anonymously on our home page. Because many questions are submitted every week, we cannot guarantee when or whether we will answer your query.

You can also peruse this archive of past Q&As that we have posted on our home page. For browsing convenience, key concepts the Q&As cover are given in boldface under each answer.


We exercised NQSOs in October of last year. In our online account, the transaction shows the withheld taxes. However, this withholding is not listed on our Form 1099-B. Is the withheld amount figured into our W-2 and already included in line 62 of Form 1040? I will prepare Form 8949 and Schedule D and just want to make sure I'm not over- or underpaying tax. Am I overlooking anything?
After you exercise stock options and sell the shares, you have two types of income: (1) compensation...
Key concepts:

tax return reporting

 
I work and live in the United States, though I am not a US citizen. I have non-immigrant alien status (L1 visa). My stock options all vested when I worked back in my home country. I now plan to exercise the options while living in the US. Will I have to pay taxes to the IRS and/or the state where I live on this income?
If you are a US resident at the time of exercise, the options are taxable in the United States, so y...

 
I have received Form 1099-B from my broker, and I don't think it shows the correct cost basis on the company stock I sold last year. For the shares I acquired from stock options and my employee stock purchase plan, it does not seem to include the W-2 income for the exercise or for the ESPP purchase. While I'm far from a tax expert, I have learned from this site that the W-2 income should be part of the tax basis. Meanwhile, for my restricted stock units, the 1099-B does not give any basis for the shares I sold. I don't want to incorrectly report the sale on the Form 8949 and overpay taxes. What should I do?
We are glad our tax return content has helped you understand the key issues you must be aware of to ...
Key concepts:

tax return reporting

 
My company used to grant stock options. Then it started making smaller grants of restricted stock units instead. Currently it has returned to granting stock options now that our stock price is lower than those of our competitors. Why these shifts?
The compensation philosophies of companies are continually changing under the influence of many fact...
Key concepts:

basics of stock compensation; restricted stock units

 
I left my company earlier this year. The vesting on my restricted stock units stopped when I left, and my outstanding salary contributions to the employee stock purchase plan were refunded. It's the stock options that I have questions about. I told the HR department that I would exercise my stock options by the first week in May. It's my understanding that my eligibility to exercise the options continues for 90 days after quitting the job (i.e. until a date in June). The company just announced that it is getting acquired. Do I still have a right to exercise the options, despite the new developments? If yes, what is the procedure to exercise them?
Look at your stock plan documents, as these will explain your company's rules. The relevant sections...
Key concepts: job termination

 
I make regular salary contributions to my company's employee stock purchase plan. This has complicated my Form W-2, as my salary and ESPP gains seem blended together. How do I make sense of it?
With an employee stock purchase plan, nothing appears on your W-2 until you sell shares, as long as ...
Key concepts:

ESPPs; tax returns

 
I am 63 years old and collect Social Security. Although I have been retired for a few years, last year I worked part-time and made $14,000. Last year, I also exercised a nonqualified stock option that had been granted to me in 2005. The income I received at exercise was roughly $4,000. Now I have received a letter from the Social Security Administration saying that since I went over the income threshold (around $14,000), I have to pay back $2,000 for making too much money. Is that right? Should the stock option be treated as true wages for 2011 or as a special bonus earned in a prior year?
If you start receiving Social Security before you reach the full retirement age, your benefits are r...
Key concepts: retirement; taxation

 
In 2007, I exercised 175 nonqualified stock options and held the shares. The exercise price was $34.22. At the time of the exercise, the fair market value of the stock was $61.58. I paid federal income tax, Social Security, and Medicare on the exercise spread. I sold the shares in 2011 at an FMV of $65.23 per share. What is my cost basis for reporting the sale on my tax return?
Your cost basis is $61.58, i.e. the FMV of the shares when you exercised the NQSOs. The compensation...
Key concepts: tax returns

 
I'm updating my will and estate plan. I have stock options and restricted stock units plus participation in my company's employee stock purchase plan. Can I name beneficiaries for these?
You should read the documents of your various stock plans. If the stock option plan lets you transfe...
Key concepts: life events

 
I am planning to leave my job in Seattle for a job in San Francisco. At my current company, I have unvested restricted stock units that were scheduled to vest across four years, and I will lose these when I leave. Fortunately, in my new job I will get more RSUs, also vesting over four years, but this means that after I make the switch I will have to wait another four years to get shares. Is this a normal practice? Do you always lose money when you switch jobs? How do I negotiate this? Is my grant in San Francisco likely to be bigger or smaller?
Unfortunately for your situation, this is how RSUs work (along with all stock grants). There is near...
Key concepts: restricted stock units; job events

 
In January 2011, my company sent me two new tax-related forms: Form 3922 for ESPP purchases and Form 3921 for ISO exercises. What are these forms? What do I do with them?
Your company is required to files those forms with the IRS and either give you copies or present the...
Key concepts: taxation; ESPPs; ISOs

 
I am considering whether to enroll in my company's employee stock purchase plan. My co-workers keep telling me the ESPP is a good deal, but I don't see it. The company takes money from my paycheck for six months, doesn't pay me interest on it, and then uses it to buy company stock. How is that a good deal?
While it's smart to be suspicious when anyone tells you something is a "good deal," employee stock p...
Key concepts: ESPPs; ESPP taxation

 
My company granted me 8,000 restricted stock units. The first 2,000 of them (25%) will vest soon. What do I need to do and decide?
Unlike stock options, which require you to come up with cash for the exercise price and taxes if you...
Key concepts: vesting; restricted stock; restricted stock units

 
At exercise, I sold just enough shares to cover my exercise cost and taxes for 2,000 stock options. The exercise price was $10 per share and the market price was $35. My W-2 shows $50,000 of income from the exercise. On my tax return, what do I report as my tax basis? Is it the full $50,000, or is it only the value of the shares I sold in the sell-to-cover exercise?
After you do a sell-to-cover exercise, selling just enough shares to cover the exercise cost and the...
Key concepts: tax returns; stock option exercise; NQSOs

 
I have 12,000 stock options with an exercise price of $57. My company's stock price is $44 (it was as low as $32 a few months ago). The options will expire at the end of the year, so unless I exercise them before then, I will lose them. Is there anything you can do with stock options that have a price higher than the current stock price and are about to expire? Can I get a tax loss for the negative spread if I exercise them?
Unfortunately, there is nothing you can do about this situation, unless your efforts and ideas alone...
Key concepts: underwater stock options

 
I plan to exercise my stock options soon. My marginal tax rate is higher than the 25% federal withholding rate that my company always uses for exercises of nonqualified stock options and the vesting of restricted stock. Can I have my company use a higher withholding rate? I don't want to be stuck with owing more taxes when I file my tax return.
Your company must withhold at either the statutory rate for supplemental income or the rate indicate...
Key concepts: NQSO withholding; restricted stock withholding; tax cuts

 
I changed jobs on April 15 and had 90 days to exercise my stock options. I exercised all of the options I had on May 15. My grant, made years ago, was for 8,000 stock options and had a 10-year term. The company referred to these as nonqualified stock options, or NQSOs. However, there were only 5,000 options in my account to exercise. Why not all 8,000?
When you leave the company to change jobs, unvested stock options are forfeited. To be able to exerc...
Key concepts: job termination

 
My company is offering me stock options. What are they? Is this a good offer that I should accept?
Employee stock options give you the right to buy shares of your company's stock for a fixed price at...
Key concepts: basics of stock grants; financial-planning strategies; job negotiation

 
I'm trying to make sense of my stock compensation income as it is shown on my W-2. Last year I had restricted stock that vested, I exercised nonqualified stock options, and I bought shares through my company's employee stock purchase plan. Do all of these trigger income that should appear on my W-2?
Income from stock compensation, along with any withholding (when required), appears in the same boxe...
Key concepts: NQSO W-2s & tax returns; ISO W-2s & tax returns; restricted stock W-2s & tax returns; ESPP W-2s & tax returns; reporting sales of company stock

 
I will lose my job in two weeks. I have vested and unvested stock options and unvested restricted stock. What do I need to do and know?
We are sorry to hear about the loss of your job. In a standard job termination due to reasons beyond...
Key concepts: job termination; exercise

 
I am about to lose my job. I have 22,000 stock options; some have vested and others will in the next few years. Because of the stock market drop last year, most are underwater. Once I leave the company, I need to exercise them within 90 days to avoid forfeiture. Can my company modify the grants to give me more time and also accelerate the vesting of the unvested stock options?
Your company can extend the post-termination exercise period beyond 90 days if the board approves th...
Key concepts: job termination; ISOs; NQSOs; vesting; underwater stock options

 
I had 90,000 stock options. I lost my job but was rehired two months later. About half of the stock options had vested, and under my stock plan I need to exercise them within 90 days of my termination. Can I have the unvested stock options reinstated, or can the exercise period on my vested options be extended to the end of the original term?
While your rehiring is great news, the unvested options were canceled or forfeited when you were lai...
Key concepts: Job Events: Termination; Job Events: Consultants & Contractors; Basics: Exercise

 
Part of my restricted stock grant will vest next month (about 5,000 shares). Is there any way I can delay the taxes? With stock options, I could pick the time of taxation by choosing when to exercise the options. Is there anything like that with restricted stock that lets me choose when I am taxed?
With restricted stock you pay the taxes at vesting unless you made a Section 83(b) election to be ta...
Key concepts: restricted stock; restricted stock units; vesting; Section 83(b)

 
I recently left a company and have vested stock options I can exercise for 82,000 shares, divided between incentive stock options (ISOs) and nonqualified stock options (NQSOs). I know that I forfeited my unvested restricted stock when I left. However, my paperwork doesn't give a timeframe in which I can exercise stock options after I leave the company. Is there a commonly used length of time or a period required by law, such as 30 or 60 days after resignation?
A post-termination exercise period for vested stock options must be disclosed somewhere in a documen...
Key concepts: job termination; NQSOs; ISOs

 
Please help me make sense of my W-2, as I am starting to collect all the information needed for my tax return. Last year I exercised stock options and immediately sold the shares in a cashless exercise on the same day. I also had restricted stock that vested, and I made two purchases under my company's employee stock purchase plan. I still hold the shares from the restricted stock vesting and the ESPP purchase. Where does the income from these appear on my W-2?
First, nothing appears on your W-2 in connection with your ESPP, though ESPP taxation gets more comp...
Key concepts: tax returns; NQSOs; ISOs; ESPPs; restricted stock/RSUs

 
My husband passed away two summers ago. I was not aware, and his company did not notify me, that he had stock options which were about to expire at the beginning of this year. Even if I had been aware, I did not have exercise rights, as his will was in probate and I was not approved as executrix until this summer. His company would not tell me any detailed information because I did not have a letter of testamentary. Is there any way to retrieve the lost money on the expired options?
We are sorry to hear about your husband. Companies are usually very strict about their post-terminat...
Key concepts: Basics: Exercise; Life Events: Death Taxes; Financial Planning: Estate Planning

 
I have about 70,000 vested incentive stock options (ISOs) in the stock of my previous company, which I just quit. The company's stock plan gives me a 90-day window to exercise these stock options before they expire. The options were given to me at two cents per share when I joined the company, and I am told the price is now 25 cents per share. I want to exercise all the stock options, as I feel that the company has the potential to be acquired or go public in the near future. What will be the tax impact when I exercise these options? I will just exercise, not sell, as the company is still private and not public.
You are asking for a primer on ISO taxation, which we have in our section about ISOs and in the Tax ...
Key concepts: ISOs: Taxes; ISOs: AMT; Tax Center: ISO Basics; Pre-IPO: Basics

 
I have received stock options in the past and also now have restricted stock. 3,000 shares of restricted stock will vest next month, my first vesting of this year. Our market price is now $42. With option exercises I could control when I received the income and therefore the timing of the tax hit. With restricted stock, can I do anything to shift the income and taxes to some later time, or I am stuck with this at vesting?
With stock options (and stock appreciation rights), at exercise you receive the income and trigger t...
Key concepts: restricted stock taxation; restricted stock withholding

 
Last year I sold 10,000 shares of company stock that I received a few years ago from a stock option exercise and restricted stock vesting. I have the 1099-B from my broker showing the net proceeds from the sales. Given that I received the shares some time ago, how do I determine their cost basis for Schedule D of my tax return?
Let's first review the tax rules. The tax basis for nonqualified stock options (NQSOs) is the exerci...
Key concepts: W-2s & tax returns; reporting company stock sales; NQSO taxation; ISO taxation; restricted stock taxation

 
Last year I exercised 5,000 stock options, and 2,000 shares of my restricted stock grant vested. I now have my W-2. How can I tell whether my company included this income, and what the tax withholding is?
Presumably, you know what your annual salary and any bonus amount to (these may be broken out on you...
Key concepts: W-2s & tax returns; reporting company stock sales; NQSO taxation; ISO taxation; restricted stock taxation

 
I have about 12,000 stock options in a company that may have backdated more stock options than just those of the senior executives. How does this backdating affect me and the taxation of my stock grants?
At a minimum, do not expect any new stock option grants with a market price lower than the price on ...
Key concepts: grants; NQSOs; ISOs

 
I have 12,000 stock options that will all vest when I retire. Most of them are due to expire 12 months after my retirement date, as they are near the end of their 10-year term. However, my plan gives me 24 months after my retirement date to exercise the stock options. Does this extend their expiration date? Also, about half are incentive stock options (ISOs). I was told that the ISOs will become nonqualified stock options (NQSOs) if I do not exercise them within 90 days of my retirement. Is this true?
It is smart of you to learn now the controlling provisions in your stock plan. No matter what the po...
Key concepts: job termination; ISOs; retirement

 
My company announced a 4-for-1 stock split. I currently have 20,000 stock options, about evenly divided between incentive stock options (ISOs) and nonqualified stock options (NQSOs). The exercise price is $12 for the ISOs and $20 for the NQSOs. I also have 5,000 unvested restricted stock units (RSUs). In the stock split, what happens to the number of stock options and RSUs, and the exercise price of the stock options?
Your company seems to be doing well, as companies usually make splits when their stock prices have s...
Key concepts: NQSOs; ISOs; RSUs

 
I did a cashless exercise of 2,500 nonqualified stock options (NQSOs) two years ago, selling all the stock at exercise. Since the full spread between my exercise and sale prices was added to my W-2, and because taxes were withheld at exercise, I thought I did not need to file the Schedule D with my Form 1040 to report the sale. There was no gain or loss, other than the commission.

About three weeks ago, I received a notice (CP-2000) from the IRS telling me that, according to my tax return of last year, I owe them over $15,000 for the stock option exercise. Since they got the 1099-B from my broker reporting the sale proceeds and I did not complete a Schedule D, they assumed $0 for a basis. How do I reply to the IRS? I also made the same mistake on the tax return I just filed. Should I amend it?

We developed a special section of our Tax Center for reporting company stock sales to help prevent t...
Key concepts: tax returns; reporting company stock sales

 
I did a cashless exercise of incentive stock options (ISOs) just before leaving a job last summer. The gain is reported in my W-2, and I also received a 1099-B from the brokerage firm that reflects the proceeds. It does not report a cost basis for the stock. If I report my true cost basis, will I be declaring a capital gain as well, causing the gain to be reported twice? As I understand it, the gain should be reported in my W-2 rather than in a 1099-B. Can the brokerage firm rescind the 1099-B, or do I just report a cost basis equal to the sales proceeds so there is $0 gain on the Schedule D?
You report the sale of your incentive stock options (ISOs) on Schedule D. You always want to report ...
Key concepts: tax returns; reporting company stock sales; incentive stock options

 
To qualify for federal college financial aid for my daughter, including loans, I need to complete and submit the Free Application for Federal Student Aid (FAFSA) to the US Department of Education annually. This form determines our eligibility for federal financial aid as well as scholarships, grants, and other aid opportunities. I have stock options that can be exercised. Do I need to list these on the FAFSA form? At what value?
As long as the student is considered a dependent of the parent for financial-aid purposes, the paren...
Key concepts: financial planning; life events

 
My company is accelerating the vesting of most of my stock options. Almost all of the accelerated options are "underwater" and about 20% are in the money. The company says it's doing this for "accounting reasons." Also, if I actually exercise any of the stock options, the company does not want me to sell the shares until the date the options would have normally vested. Do I pay extra tax because of the acceleration or less because I cannot sell the shares when I want?
Let's begin with the "accounting reasons." Starting on January 1, 2006, every US company must recogn...
Key concepts: vesting; exercise; sales; underwater stock options

 
I was heavily recruited by my company, which granted me a large number of stock options. The employment agreement said I would have one year after any termination to exercise the stock options. I was terminated and tried to exercise them about six months later. The company says it cannot permit the exercise because the stock plan and my stock option agreement allow only 30 days after termination to exercise. Which controls?
In the absence of any further facts, usually the stock plan rules override other agreements that wer...
Key concepts: job termination; exercise

 
I am losing my job before my restricted stock vests. I got a cash dividend, received a 1099-DIV, and thus paid federal income tax. I have been told I will be denied ownership of the shares because I was not employed at my company for the entire vesting period. Shouldn't I be entitled to the shares because I received dividends in cash?
Dividends are a valuable part of restricted stock grants. By contrast, if your company granted restr...
Key concepts: restricted stock; dividends

 
I was not authorized to exercise any of my stock options until July 1. I was terminated two months before, on May 1. According to the terms of my stock plan, "the Optionholder may exercise the rights which were available to the Optionholder at the time of such termination only within three months from the date of termination." Aren't stock options "rights which are available" to me? My thinking was that I had until August 1 to exercise the options (three months from my termination date). But the company says I was able to exercise only options that had vested by the time of my termination, and zero options had vested by May 1.
I am sorry to learn of your situation. Stock plan language is sometimes not clear, as the drafters m...
Key concepts: job termination; vesting

 
I am planning to leave my job, but I want to get the timing right so that my in-the-money unvested stock options vest before I quit. They will vest in about two weeks. If I give three weeks' notice that I plan to leave, will the stock options still vest? Do the shares stop vesting when I give notice or on the actual date of termination?
Interesting question. It's good that you are thinking about this, as we hear too many sad stories ab...
Key concepts: job termination; vesting

 
Last year I received 5,000 shares at vesting in my company's restricted stock unit (RSU) plan. But the company used 1,500 shares to pay the withholding taxes, so in the end I received 3,500 RSU shares. My W-2 shows the value of all 5,000 RSU shares, not the net 3,500, as compensation. Was I supposed to receive a 1099-B for the RSU shares that were held back for tax withholding, and do I report these shares on my Schedule D?
You ask a good question. We too have been looking into whether you must report on Schedule D the sha...
Key concepts: restricted stock units; tax returns

 
I hold both NQSOs and ISOs. They will all vest upon an upcoming merger, an all-cash deal in which optionholders are paid $30 per share for their outstanding stock options. Can I avoid some of the Social Security and Medicare taxes by exercising my vested stock options now? I've heard that when stock options are bought by the surviving company, the resulting gain is treated as ordinary income and is subject to not only state and federal taxes but also Social Security and Medicare.
In this acquisition structure, you are not first exercising your options and then selling the stock ...
Key concepts: mergers & acquisitions

 
After leaving my job, I had 60 days to exercise my stock options. But I miscalculated my 60 days, and the stock options expired yesterday before I could exercise them. All these stock options were in the money. Is it possible to have the exercise period extended for one or two days? Do I have any alternatives?
We are sorry to learn of your miscalculation. We are asked this type of question more often than any...
Key concepts: job termination; exercise

 
I will retire in December with 17,000 vested stock options and 10,000 unvested stock options whose vesting my company will continue. The vested options are in the last year of a 10-year term that would normally expire the following December. The standard post-termination exercise period is 90 days, but my stock plan says that I have two years after voluntary retirement to exercise my vested stock options. Will I have two years after I leave the company or until the end of the 10-year term? How long will I have to exercise the unvested stock options after they vest?
It's good that you are thinking about this apparent conflict now. Not all stock plans neatly group t...
Key concepts: retirement; vesting; exercise

 
I have been granted more than 50,000 stock options over the years, ranging in exercise price from $10 to $49 dollars. Most of the stock options are vested with various terms left before expiration. I have not exercised any of them. Would I be better off with exercising all the vested stock options in a same-day exercise and sale and then parking the proceeds in another investment? I know the conventional wisdom tends to say you should hold the stock options until the end. However, does that same wisdom apply to company stock that is not appreciating significantly or is experiencing volatility?
If you are doing all this yourself, what is most important is that you pick a strategy that you feel...
Key concepts: financial planning

 
When my 2,000 shares of restricted stock vested at $20 a share, I traded in 625 shares to my company to pay my taxes. The amount reported to me on my W-2 was $40,000. I sold the remaining 1,375 shares the next year at a price of $25. Since I had to provide $40,000 worth of labor to acquire the capital asset of 1,375 shares, it seems that my cost basis for the 1,375 shares should be $40,000. And that doesn't make sense, since it means I would end up with a short-term loss. (Proceeds: 1,375 x $25 = $34,375; $34,375 minus the $40,000 basis results in a loss of $5,625.) Is my thinking wrong?
You're right in that the amount reported to you on your W-2 is the cost basis. However, you should t...
Key concepts: restricted stock; tax returns

 
I did simultaneous cashless exercises of many vested stock options from ten grants that I received over the years. The exercise prices varied, and each grant had about 2,000 outstanding stock options (about 20,000 stock options in total). The stock price when I exercised/sold was around $60. Do I need to report each of these sales separately on my Schedule D, or can I aggregate them in one line because I exercised and sold the stock on the same day?
This is an interesting question that the IRS has not given specific guidance on. The amount of ordin...
Key concepts: tax returns; exercise

 
I am sitting here and trying to work out how to report my cashless nonqualified stock option exercise on my tax return. I cannot make sense of all the numbers, papers, and forms in front of me. My head is spinning and I am getting frustrated. I exercised in a same-day sale 5,000 stock options that had a $10 exercise price, and the stock was trading at $20 on the day I exercised. I received a check from a broker for $33,000; the W-2 indicates $50,000 of my compensation is from the stock option exercise; and the 1099-B from the broker has $99,500 for the proceeds. Why do none of these numbers match?
The complex technical steps in a cashless exercise aside, essentially all the stock option shares ar...
Key concepts: tax returns; exercise

 
I will have substantial blocks of stock options to exercise in the years after my retirement. I expect no other income. Will the "wages" that result from these stock option exercises count against the Social Security retirement-income limits (I am still below full retirement age), thus reducing Social Security benefits in the exercise year? Would this stock option income alone qualify me to establish a Roth IRA (as long as the income was below the Roth limits, of course)?
The stock options granted while you were previously employed do not count against the Social Securit...
Key concepts: retirement; retirement plans; tax returns

 
My company is going to restructure. It suggests that I move my family to our headquarters to keep my job or, more specifically, a position similar to mine that will be opened at our HQ. I have a number of stock options that are in the money but not vested. I wonder whether I can negotiate a buyout of those stock options if I choose not to move my family. Are there any legal issues with this?
Not "legal issues," as in special rights you may have in unvested stock options (assuming all employ...
Key concepts: job termination

 
My company has offered to exchange underwater options for market-price options. To avoid taking a hit in earnings, the company will wait six months and one day to make the exchange. If the company did not wait, how would I be affected? Would I have ordinary income for the difference between the old and new option prices?
There is no tax impact for you until you exercise the options. You do not pay tax on the exchange of...
Key concepts: underwater options

 
My company terminated my employment in late June, when my position was "eliminated." At the time I had about 5,000 in-the-money stock options that were fully vested. No one informed me of any requirement to take action or of any pending action. I looked up my account yesterday and found that all of my vested options "expired" in late September, 90 days after termination. Was the company or the brokerage firm required to notify me that the vested options were about to expire or that they expired?
No. While some companies send registered letters to outgoing employees with the number of shares the...
Key concepts: job termination; vesting

 
My stock option grants have noncompete provisions. Do restricted stock grants also have them?
These provisions are not as common with restricted stock. Once the shares vest they are yours to be ...
Key concepts: restricted stock; job termination

 
I keep hearing about companies that are thinking about granting restricted stock instead of stock options. If I think my company's stock price will do very well over the term of the option grant, it seems to me that I'm better off with stock options. I will get many more of them. Why do companies grant fewer restricted stock shares than options when the options seem more valuable? If I normally would get 10,000 options, why would I get maybe 3,000 or 4,000 shares of restricted stock? Is my thinking backward, or has my memory of underwater options faded too quickly?
Your thinking shows that you like the upside potential of options over the "safety" of restricted st...
Key concepts: restricted stock

 
The IRS just sent me a notice that says I owe $18,000 in taxes from 2001. They believe I underreported a gain on a sale of stock, which was in fact a cashless exercise of my NQSOs. I did not include the transaction on Schedule D because I knew the amount of the gain was already included as ordinary income on my W-2. However, the IRS sees the proceeds from the broker for the transaction and do not see anything on my Schedule D. I know that I have paid tax on the transaction. But should I have included the sale on my Schedule D with the proceeds equal to the cost, with no gain or loss reported?
Yes. Whenever you have a sale of stock you need to complete Schedule D. Your tax basis for the NQSOs...
Key concepts: NQSOs; tax returns; sales

 
I just realized that on my tax return I overpaid for my 2002 sale of NQSO stock, which I acquired from options that I exercised in 1998. I bungled my records and used the exercise price of the NQSOs as my tax basis in calculating my capital gains. I did this instead of rightly using the exercise price plus the W-2 income that I paid taxes on for the spread at exercise (basically the stock price at exercise), as your Tax Center explains that I should have done. My exercise price was $17 on 12,000 options. The market price when I exercised was $25 ($8 spread per option). I notice that on my W-2 for the year of exercise the additional income is $96,000 ($8 x 12,000 options). Thus I paid tax on $96,000 of capital gains by mistake. How do I get this back?
Don't feel bad. Whether you misinterpreted your records or the tax law, you should file an amended r...
Key concepts: NQSOs; tax returns; exercise

 
My husband made me the beneficiary for his stock options. He died in 2000. I exercised the NQSOs in 2002; the company issued Form 1099, and there was no withholding. Is this the correct way to do this? Also, do I now need to report self-employment tax (both sides of FICA) on the option income?
When you exercised the option, it triggered ordinary income to you. The employer correctly reported ...
Key concepts: death; tax returns; NQSOs

 
I plan to exercise about 10,000 options in my company soon, and it pays a nice dividend. Are there any strategies, or at least mistakes to avoid, with exercising options for stock that pays dividends?
You want to be aware of the ex-dividend date. This can affect both the spread at exercise and whethe...
Key concepts: dividends; financial planning

 
I exercised NQSOs in 2001. My total exercise cost was $46,000, giving me income in 2001 on the spread of $50,000 at exercise. This $50,000 was reported on my W-2 last year as taxable income. In 2002 I sold all the stock for $120,000 after commissions. When my accountant calculated my capital gains on Schedule D of my tax return for this year, he listed the cost of $46,000 as resulting in a capital gain of $74,000 ($120,000 minus $46,000). Did we need to enter a different cost amount on Schedule D to avoid this double taxation, as I already included $50,000 of this gain in my 2001 income?
This is the big mistake with reporting sales of NQSO stock on Schedule D. To avoid double taxation, ...
Key concepts: tax returns; NQSOs; sales

 
The vested NQSOs of my relative are included in his gross estate at death. But what is the tax treatment if his estate or beneficiary never exercises them? For example, on the date of death the fair market value of the stock is $45, the exercise price is $40, and $5 per option will be included in the gross estate for estate tax purposes. But before I exercise the inherited options the stock's value drops and stays at $38. Exercising underwater options makes no sense, so I let the options expire. Yet the $5 was included in the gross estate on which I paid estate taxes without anyone receiving income.
When options are exercised, generally the estate or beneficiary is able to take an income tax deduct...
Key concepts: death; underwater options

 
I have 12,000 NQSOs with a $12 exercise price. My company stock is trading around $15 but has consistently been in the $50-$60 range in the past. I expect the stock price to return to these levels eventually. Are there any strategies (or mistakes to avoid) in a market upturn?
When the stock market rebounds after a fall, one of the most common mistakes among optionholders is ...
Key concepts: financial planning

 
I learned of your site three days too late, I'm afraid. I exercised ISOs that have been vested for more than two years. I did a same-day sale/cashless transaction, hoping I could apply "capital losses" from other stock against it. Now a buddy tells me that I just disqualified my ISOs, making the sale proceeds ordinary income and leaving me with no way to reduce the tax -- which will be nearly $40,000. Do you have any creative suggestions?
You needed to hold the stock one year after exercise to obtain beneficial long-term capital-gains ta...
Key concepts: ISOs; exercise; taxation

 
I seem to be caught in a Catch-22 situation. My company requires employees to exercise options within 60 days of termination. I am also restricted by a blackout period and have insider knowledge of financial results that will be announced in the next few months. If I left the company next week, could I exercise my 22,000 options? I have a limited time to exercise but am restricted from exercising because of the blackout period and my inside information.
The exercise itself would not be insider trading, so you may exercise and hold the stock. The sale o...
Key concepts: insider trading; job termination

 
I have always found the taxation of ISOs confusing. Last year I exercised about 7,000 ISOs with a spread at exercise of about $16 (a total of $112,000). I still own the company stock. Through ignorance I did not report the ISO exercise-and-hold on my tax return for that year or complete the form to determine whether I owe any AMT (which I now learn is likely). What are the consequences?
Generally, if you find a tax-return error, and the statute of limitations period has not yet ended, ...
Key concepts: ISOs & AMT; tax returns

 
My company has announced a "reduction in force" (RIF), a euphemism for large planned layoffs. I have about 9,000 vested options. Friends at other companies have faced similar situations, and the post-termination exercise periods for their options were extended beyond the 90-day period in their plan. Are companies required to do this?
No. When your company ends your employment, the vesting clock will stop, and post-termination exerci...
Key concepts: job termination

 
My company is selling the small division I work for to focus on its core business and make its balance sheet less confusing to investors. I will no longer work for the company but will still have the same job, with new corporate owners of my division. I have 17,000 options, about half of which are now vested. What will happen to them?
Check your stock plan to see if it addresses this type of divestiture in which just a small division...
Key concepts: M&A; vesting

 
Just as bad news was being announced about Enron, the media reported that Enron employees couldn't make trades in their 401(k) plans. Do blackout or lockdown periods exist for stock plans as well?
Some in the media have confused "blackout" with "lockdown." In the context of stock plans, these ter...
Key concepts: insider trading; retirement plans

 
I exercised 10,000 ISOs in February of last year. The option price was $2. The stock price was $22 on the date I exercised. Before the end of the year, I sold 7,500 shares at the price of $17. I have two questions: (1) Can I use the $112,500 [7,500 x ($17 - $2)] gain from these 7,500 shares to offset the capital loss from other stocks I traded, or will the gain be reported as income on my W-2?; and (2) Is it correct that I have to report only 2,500 shares for alternative minimum tax (AMT) purposes?
When you sell ISO shares in the year of exercise, you remove them from the AMT calculation. Thus, on...
Key concepts: ISOs & AMT

 
My company's employee stock purchase plan (ESPP) seemed a good deal. But I am baffled by the tax rules on my sale of the stock when I hold the shares after the purchase but not long enough to qualify for special tax treatment. At the start, the grant-date price was $10; at the end, the price was $40. So I paid just $8.50, 85% of the lower of the two prices, to buy the stock. I later sold my 500 shares at $18.50, giving me a $5,000 profit. Why am I now being told that I need to pay tax on $15,700 in compensation income?
You did not hold the ESPP stock two years from the date of grant and one year from purchase. So you ...
Key concepts: ESPP: Taxes

 
I plan to exercise 10,000 nonqualified stock options (NQSOs) at $5 each. The current price is $12.80, so the total taxable income will be $78,000. I plan to hold the stock after exercise. If after one year I sell the stock so that it results in a long-term capital gain, how will I recover the difference between what I already paid in taxes and what I will then owe?
The exercise and the later sale are two separate transactions. What you really are asking is: "If I ...
Key concepts: NQSOs; taxation

 
I want to make a gift of my company stock and options to a charity related to the September 11 terrorist attacks. I have about 10,000 shares of stock from an NQSO exercise last year and 12,000 vested options from the same grant. The exercise price is $15.50 and the current market price is $65.50. What tax impact will result from making this gift of stock?
If you have held the shares for one year from exercise, the IRS will let you deduct the current fair...
Key concepts: gifts

 
I have 80,000 substantially in-the-money options in my company and two Ivy League tuitions to pay. The tuition bills arrive five times a year, with the first payment due in late September. I want to set up a program with my company and broker in which I automatically exercise enough options and sell the stock to pay each tuition bill as it's received, using the net proceeds. Could this prearranged selling plan violate insider-trading laws and my company's blackout rules?
You are in luck. SEC Rule 10b5-1 now provides a safe-harbor defense from insider-trading liability f...
Key concepts: financial planning; insider trading

 
When I exercised 12,000 NQSOs, my proceeds before taxes were about $80,000 -- just enough for my house renovation. However, after federal, state, and Medicare taxes (I've already reached the Social Security income limit), my proceeds were reduced by 40%. So the check from the broker was only $48,000. Can I deduct the state tax that was withheld from my NQSO exercise?
Generally, state taxes are an itemized deduction on your federal tax return, along with other well-k...
Key concepts: exercise; tax returns

 
My company has gone through two rounds of layoffs. Fortunately, I still have my job and in-the-money stock options. However, my company has suggested (very strongly) that I take an extra two weeks of summer vacation, unpaid. I have 7,000 options that are about to vest after two more months of employment. How will this unpaid period affect my vesting schedule?
To begin, always check your stock plan documents for any guidance on this type of situation. They ma...
Key concepts: vesting; job termination

 
A chunk of my vested options is finally in the money. I estimate a taxable gain of about $44,000. I also still have a few grants of vested underwater options, with the exercise price above the market price by about $10 per share ($15,000 in total). If I exercise all my options, can I offset the gains in the options with the losses (on the underwater options) in order to have a taxable income of only $29,000?
This is wishful thinking, because these are two separate transactions. It does not make sense to exe...
Key concepts: underwater options; exercise

 
I know that if I have a huge income hit through an NQSO exercise I might have to pay estimated taxes. What about an ISO exercise in which I plan to hold the stock after exercise? I will have a gain of about $200,000, which almost certainly will trigger AMT. Do I need to pay estimated taxes on ISOs when the AMT I owe is much greater than my current salary withholding?
Tax law imposes a penalty on taxpayers who do not pay "enough" tax during the year, either through w...
Key concepts: ISOs & AMT; tax returns

 
How do stock options affect the Roth IRA income limits? My Adjusted Gross Income (AGI) is less than $150,000 (filed married joint return). However, because of my ISO exercise, I ended up paying AMT for an amount that is higher than the ordinary income tax rate for $150,000 AGI (even though I did not sell the stock). Can I still contribute to my Roth IRA account?
The effect of stock options depends on the type of option and how the exercise was accomplished. ISO...
Key concepts: retirement plans; ISOs & AMT

 
I spent $20,000 to exercise options last year in a pre-IPO company that never went public and went out of business. I paid taxes of about $6,000 on the spread at exercise. Is there any way to reclaim the taxes or get a writeoff for the money I paid?
You can take a loss from completely worthless company stock you own. The company must effectively be...
Key concepts: pre-IPO; exercise; tax returns

 
I purchased company stock last year at a discount of $5 per share from the market price under my employee stock purchase plan (ESPP). I didn't notice anything on my W-2 related to it. Is this a mistake? How about when I sell my ESPP stock -- will anything show up on my W-2 then?
Nothing in connection with an ESPP purchase is reflected on your Form W-2 unless and until you sell ...
Key concepts: ESPPs; tax returns

 
I did a same-day exercise and sale of incentive stock options (ISOs). I received a confirmation of exercise from my company for approximately $10,000. This amount was not listed on the W-2 that I received from my company, even though I made a disqualifying disposition. Where do I report this gain on my tax return, and how will I be taxed?
Some companies do not report ISO disqualifying dispositions on W-2s. The gain over the exercise pric...
Key concepts: ISOs; tax returns

 
I did a same-day exercise and sale of incentive stock options (ISOs). The $56,000 spread between the exercise price and the sale price is reported on my W-2 as wages. I also received a Form 1099-B from my broker, showing the sale proceeds. Should I report the transaction for capital-gains purposes even though the gains are zero, and should I worry about the alternative minimum tax (AMT)?
By selling the ISO stock when you exercised it, you eliminated AMT. The same would be true if you so...
Key concepts: ISOs; tax returns

 
I did a cashless exercise with my NQSOs last year. My employer included the difference between the market price and the exercise price on my W-2, which I will report as ordinary income on my tax return. I also received a brokerage statement (1099-B) showing the value of what was sold. Does this mean I need to show the transaction on Schedule D of my Form 1040 tax return, or can I ignore the broker's statement since there are no gains or losses to report?
You should still file Schedule D, which is used to report capital gains and losses. If the sales pri...
Key concepts: NQSOs; tax returns

 
I exercised some options to buy my house in 2000. The gain (market price at exercise minus grant price) realized through my NQSO exercise is reported on my W-2 as ordinary income. Unfortunately, compared to my NQSO exercise, I didn't do so well with my stock trades. Is there a way to use my stock losses from 2000 to offset this income?
The tax law says that you can offset losses against only the same type of income. This means you can...
Key concepts: NQSOs; tax returns

 
I exercised my incentive stock options (ISOs) when the spread at exercise was $10. I watched the stock go far up -- and then down. Currently, the spread is at $5. At least I will make some money if I sell now; but will the resulting tax on ordinary income be greater than the alternative minimum tax (AMT) I would pay if I held the stock?
A rule of thumb is that your stock's price has to fall more than 30% from its price on the day of ex...
Key concepts: ISOs & AMT; financial planning

 
Earlier this year (prior to the market correction), my company filed for an IPO. In anticipation of this, I exercised a significant number of NQSOs when the fair market value was $2.80 per share (my exercise price was 5 cents per share). At that time, I paid income tax on the spread. Well, the IPO was postponed, and we are raising another round of private funding at $1.50 per share. Is there any way I can have the dollar amount of the income I incurred reduced to reflect a lower spread based on the current value? This would significantly reduce my tax burden.
The rules make it clear that with NQSOs the tax treatment does not depend on what happens to the sto...
Key concepts: pre-IPO; exercise

 
I am 62 years old and am receiving Social Security. I have stock options from my employer that were issued prior to my retirement. When I exercise my NQSOs, I understand that a W-2 will be issued and the gain will be taxed as ordinary income. Yet the Social Security website (www.ssa.gov) indicates that investments and investment income are not income to be considered against the Social Security annual earnings limit. Therefore, when I exercise my options, what will the impact be on the annual earnings limit?
Income from the exercise of employee stock options is not investment income: it is compensation inco...
Key concepts: retirement; NQSOs

 
Our company grants ISOs that vest and become exercisable on the same day. They are not early exercise ISOs subject to repurchase by the company. I exercised 2,000 ISOs with a $5 exercise price in February when the stock was at $40. The stock crashed and is now at $4. The $70,000 spread at exercise ($35 x 2,000 shares) is part of my calculation for alternative minimum tax (AMT). It looks like my AMT liability will exceed my regular tax liability by approximately $18,000. Can I now sell the stock at $4 and negate the $70,000 added back for AMT purposes?
Yes, as long as you sell the shares on or before December 31, 2000. By selling the shares that you a...
Key concepts: ISOs & AMT

 
I may leave my company to become a consultant and move to another state. Will there still be withholding on my nonqualified stock options (NQSOs) as when I was an employee? Does it matter that I will live in another state when I exercise them?
As a general rule, most companies base withholding on your employment status at the time of grant. I...
Key concepts: consultants and contractors; NQSOs; tax returns

 
I have a total of 6,000 options, all NQSOs. I am now vested in about 4,000. The other 2,000 will vest in about 18 months. I do plan on hanging around to get them. The stock has done extremely well in the past 2 years and I am now in the position of paying off my house if I sell 3,000 of the options. What is the best strategy for me?
If you want cash to meet goals such as paying off your house, you should simply exercise and sell. D...
Key concepts: NQSOs; financial planning

 
When does it make sense to seek long-term capital gains with stock options? In other words, should I exercise stock options and hold the stock early in the option term?
If you hold NQSOs, almost never. The short explanation: Considering the return on alternative uses o...
Key concepts: financial planning; taxation

 
I have about 10,000 vested stock options shares from my company, of which about 3,000 shares are NQSOs, and the rest are ISOs. My company stock tripled in the last year, and currently is considered as undervalued by many stock analysts. My strategy is to exercise and sell all the NQSOs at this time, then use the proceeds to exercise and hold the ISOs for the long term. Please advise if you think otherwise.
Unfortunately, there is no simple answer for you. First, you need to decide on your needs, risk tole...
Key concepts: financial planning

 
I am about to leave my company and have approximately 5,000 vested and 8,000 unvested options. What can I do to keep as many options as possible?
The 5,000 vested options are probably yours to keep, but not forever, and you will lose the 8,000 un...
Key concepts: job termination

 
I just learned that our company will be acquired by a large competitor. I have 10,000 stock options from my company: 4,000 of the options are vested; 6,000 are unvested. What could happen to my stock options?
Read the terms of your option agreement and the stock option plan carefully. These two documents wil...
Key concepts: M&A

 
The company I work for is going public. How soon can I sell my option shares after the IPO?
The quick answer to your question is this: 90 days after the IPO. This assumes that your company gra...
Key concepts: pre-IPO; SEC law