Alert: For stock sold during 2011, you must file with your tax return the new IRS Form 8949 along with Schedule D, which has significantly changed upon the introduction of Form 8949. This change stems from the expansion of the information that brokers must report to you on IRS Form 1099-B.
"Capital gain" is income that arises from the sale of a capital asset. Gain from the sale of securities held for investment (e.g. stock acquired by the exercise of a stock option or by the vesting of restricted stock) is a type of capital gain. For employee stock options, the holding-period clock begins to run on the day after exercise.
You must file IRS Form 8949 and Schedule D with your federal Form 1040 tax return for any tax year in which you have sold stock. You must file these regardless of whether you have a capital gain and even if you sold your option stock immediately at exercise (i.e. cashless exercise, same-day sale) or if you sold your restricted stock at vesting. On your tax return, you report the exercise date (vesting date for restricted stock) as your purchase date, even though your holding period does not begin until the following day.
Tax Rules
The taxation of capital gain from the sale of stock depends on how long the asset is held, and additional rules apply to incentive stock options (ISOs). Capital gains may be short-term (from securities held 12 months or less) or long-term (from securities held more than 12 months). Capital losses are used to offset capital gains to establish a net position for tax purposes. Only $3,000 of net capital losses can be deducted in any one year, and the remaining balance is carried over to future years indefinitely. Short-term capital gains are taxed at ordinary income rates. To see annotated examples of tax return reporting for company stock sales, visit the Tax Center.
Tax Rates And Changes
The top rate of tax on long-term capital gains is 15% and, under the 2010 Tax Relief Act, will remain so at least through 2012. (A similar rate applies to qualifying dividends.) However, if you are in the 10% or 15% bracket for regular-tax purposes, your tax rate on long-term capital gains is 0% through 2012 (this rate dropped from 5% to 0% in 2008). This 0% rate can present you with certain strategies for gifting your company stock, as explained in another FAQ.
Alert: Starting in 2013 a Medicare surtax of 3.8% to finance health-care reform will apply to investment income, including capital gains and dividends, for people with annual modified adjusted gross income over $200,000 ($250,000 for married joint filers). This will, in effect, raise the top rate on capital gains to 23.8%. Compensation from stock option exercises and restricted stock vesting could push up your capital gains rates on sales of shares and on dividends.
Further Reading
As articles and FAQs in the ISO section and the Tax Center explain in detail, with plenty of examples, the calculation of capital gains for ISOs is more complex than it is for NQSOs. For instance, if you exercise ISOs and sell the stock within one year after exercise (i.e. disqualifying disposition) when the market price is lower than it was at exercise (but still above the exercise price), your full gain is ordinary income. In addition, if you pay alternative minimum tax (AMT) on the exercise of ISO stock that you hold, your capital gains calculation when you sell will differ for AMT and ordinary income tax. |
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