For NQSOs or SARs exercised on the last business day of 2017, or for restricted stock that vests on that day, is the income taxable in 2017 or 2018?
The income will be included in tax year 2017, even if you recognize it on the last business day of the year—it does not matter that your company will not send the taxes to the IRS until January 2018. Stock option income recognized on an exercise date in 2017, and restricted stock/RSU income with a vesting date in 2017, will be included in 2017 taxable income and on your W-2 for 2017, and will count towards your annual Social Security income limit for 2017, which is $127,200 (in 2018, it is $128,400). In addition, stock sales on the last business day of the year, which is also the last trading day of the year, are considered transactions in that year.
Alert: You will want to ask how your company handles stock plan vestings scheduled for December 31 or January 1. Will the vesting revert to the previous business day or the next business day?
How Is The Exercise Date Defined?
You should confirm how your stock plan defines the exercise date. For most companies, the date when the notice of a cashless exercise is received in a same-day sale is considered the date of payment, so the income would be for 2017. However, if the company uses the date it receives payment from the broker for the sale, i.e. the settlement date, and receives this payment in 2018, the exercise would be counted as income in 2018.
If you're doing an exercise-and-hold of options or SARs with cash it must be sent in to your company or plan administrator by December 31. Check your plan documents and rules for procedures and deadline, as the exercise must be completed by year end.
After making a cashless or sell-to-cover exercise, you will receive IRS Form 1099-B from your broker by February of the following year. You report this stock sale (and the W-2 income) on the tax return for 2017 that you file in 2018. For details, see the section Reporting Company Stock Sales, where the FAQs have annotated diagrams of the necessary IRS tax-return forms.