IRS notices for unreported stock sales: how to prevent them, and how to respond if you get one

Offsetting restricted stock income with stock-trading losses

Tax return articles on

Pro Membership for financial and wealth advisors

Roth IRAs; disability and pension payments; ESPP financial planning; tax reporting for backdated stock options

AMT reforms considered by Congress at upcoming conferences and meetings



Think Twice insider trading prevention videos: educate, entertain, and jolt your employees and executives

Equity Focus: Simplifying stock option administration and FAS 123(R) valuation for venture-backed, privately held, and small public companies. Download your free copy of "Five Easy Steps To Create Auditable Stock Option Records And Comply With FAS" at

Net Worth Strategies: Solutions that maximize the value of equity compensation to companies and their participants (



Tax season is the busiest time for site traffic on Members visit us for our very useful Tax Center, with its annotated illustrations of Schedule D for sales of stock from all types of equity compensation. Below you will find the text of two FAQs about tax return topics, links to our articles about tax returns, and other new content.

Many users of our site have become Premium Members and Pro Members. In addition, companies, stock plan providers, and financial advisors are also contacting us about:

  • purchasing Premium Memberships in bulk at discounted subscription rates
  • licensing our easy-to-integrate Knowledge Center of content for HR and compensation portals, and for stock plan service providers' websites
  • creating custom websites that import grant data automatically, post stock plan documents, and match the look and feel of your company's site

For more information on these corporate services, please email inquiries to Have a great spring!

 ~ Bruce Brumberg, Editor-in-Chief


Below are two frequently asked questions (FAQs) on tax returns from our Tax Center. They are taken from the 700+ FAQs on All of these are available for your company to license or by Premium or Pro Membership. Please do not copy or excerpt this information without our permission.

Question 1:

I received a notice (CP-2000) from the IRS stating that, according to last year's tax return, I owe money for the cashless exercise of my stock options. I thought I paid all the taxes through withholding at exercise. How should I reply, and how can I prevent this problem with my current tax return?


You made this mistake because the stock sale at exercise did not generate any gains. The full spread between your exercise and sale prices was added to your W-2, and taxes were withheld at exercise, so you thought you did not need to report the sale on Schedule D of your Form 1040. However, when the IRS received the 1099-B from your broker reporting the sale proceeds without your reporting the transaction on Schedule D, they assumed $0 for a basis. In its Tax Center, has a special section on reporting company stock sales that you may find helpful for preventing this type of run-in with the IRS.

The standard course is to send the IRS a letter (to the address in the notice) explaining that your tax basis is the same as your selling price, and giving the reason you omitted the sale from your Schedule D. You send a copy of your W-2, highlighting the portion of your W-2 wages included in Box 12 for the NQSO exercise. You may want to submit an amended tax return (Form 1040X) that includes the sale of your stock at exercise on your Schedule D. If you paid a broker's commission or other transaction fees for the sale, you have a small capital loss for the transaction on Schedule D, along with the ordinary income for the exercise spread.

The IRS routinely sends this notice when it thinks you underreported income. See the IRS website for more information. In this situation, you should always speak with your own tax advisor about the details of the response and whether you ought to complete an amended return.

For other big tax-return mistakes to avoid with stock options or restricted stock and RSUs, see related FAQs on If you need to file an extension because of your extra stock compensation last year, avoid interest and penalties by paying enough taxes with your extension, as explained in another FAQ.

Insider Trading Prevention And Education:
Think Twice Video And Intranet Series
Request free previews at

With insider trading cases in the news, now is a good time for insider trading education and focusing on your compliance program. The dramatic Think Twice video series will teach, entertain, and jolt your employees and executives about insider trading and securities fraud. Used by over 1,000 companies and developed with input from the SEC Enforcement Division, these powerful videos with memorable story-lines will drive home key points on

  • what insider trading is
  • the penalties and consequences
  • how the SEC discovers illegal activity
  • what happens if illegal tipping or trading is suspected
  • how SEC investigations are conducted

For more information on the Think Twice video series, and a free white paper on insider trading prevention and education, see Both VHS and DVD formats are available. Qualified corporate buyers, including pre-IPO companies, can request free previews. Intranet licensing is available.

Question 2:

The value of my restricted stock at vesting is reported on my W-2 as ordinary income. Can I use my stock-trading losses to offset this income?


The tax law says you can offset losses against only the same type of income. This means you cannot use capital losses from stock sales to offset ordinary income from the vesting of restricted stock/RSUs (or from a stock option exercise). However, there is one small exception to the "matching" rule that lets you harvest your stock-trading losses against ordinary income.

To do this, you separately net all long-term and short-term transactions during the year on your Schedule D. Then you combine the net long-term capital gain or loss for the year with the net short-term capital gain or loss for the year and arrive at an overall net capital gain or loss. When you have a net capital loss, you may be able to offset up to $3,000 of ordinary income from any source for that year. The balance of your capital loss carries over to the next tax year. You repeat the process the next year and, if necessary, for any tax year thereafter until the loss is exhausted.

For other details on capital gains tax and reporting, see the section Restricted Stock: Taxes Advanced on

Two Step SoftwareFAS 123R VALUATION:
Five Easy Steps To Create Auditable Stock Option Records And Comply With FAS 123R

Are you concerned about:

  • Greater auditor scrutiny and new FAS 123R requirements?
  • Demonstrating legal compliance and presenting supporting documentation?

Do you want to avoid:

  • Multiple systems, data inconsistency, and misplaced documents?
  • Scrambling around at the last minute to create reports for a specific date or for a particular reporting period?

Whether it's too many spreadsheets or too many calculations, sometimes you just don't know where to begin. Click here to learn five easy steps to create auditable stock option records and comply with FAS 123R.

Free white papers, demonstrations, and 14-day trial available at

Contact: (800) 223-8900 or, and please mention your referral by

SPECIAL ARTICLES ON TAX RETURNS has special sections on tax return topics in our Tax Center.

Avoid Costly Tax Return Mistakes And Maximize Your Profits: What Optionholders Need To Know, by Bruce Brumberg and Lynnette Khalfani This is premium content
Tax-filing season can be onerous. If you're puzzled by a 1099-B form or don't quite know how and where to report option or ESPP gains and losses, this article is for you. Click here to read it.

ISOs: Tax Return Tips And Traps, by Martin Nissenbaum This is premium content
Tax reporting with incentive stock options can be tricky. Learn what you need to report on your return at each stage of your ISO's life cycle. Click here to read the article.

Other popular tax return articles include:

NQSOs: Tax Return Tips And Traps, by Martin Nissenbaum This is premium content

Stock Option Financial Planning After Your Tax Return Is Filed (Part 1), by Tom Davison and Liam Hurley This is premium content

Content with the This is premium content symbol requires Premium Membership.

Return to table of contents



We are receiving high praise for the new membership level we call (MSO) Pro, specially designed for financial advisors, wealth managers, CPAs, and anyone who tracks and models equity grants for others. Introduced late last year, MSO Pro gives you the power to track and model grants for multiple clients with our award-winning record-keeper and tools, plus special features for proactive client communications and relationship-building. You can choose a membership level to track and model for 5, 10, 25, or more clients.

MSO Pro gives you access to all the features of Premium Membership, plus:

  • Grant tracking and modeling for multiple clients
  • Grants you have already entered in transfer seamlessly to MSO Pro
  • Client portal where your clients have special access to a confidential, highly secure site to see their grants online
  • Co-branding of your firm's identity in the client-accessible site
  • Grant alerts reminding you of important dates and target values for each of your clients, plus the flexibility to send alerts to selected clients
  • Create and save scenarios for you and your clients from any of the calculations you run in our tools
  • All our exclusive articles by leading experts in financial planning, tax and securities law, and stock-based pay
  • 700+ FAQs on all aspects of equity compensation
  • PDF versions of articles, FAQs, and all tool results that you can send your clients, all co-branded with your name and firm
  • Reports on your clients' investable stock compensation gains, individually and in aggregate

Track and communicate with multiple clients

Send grant alerts to yourself and to your clients

Create and save tool results as "scenarios" you can call again with one click

For more information on MSO Pro and to become a Pro Member, contact or click on myClients after signing into the site.

Return to table of contents



Below are selections from's newest award-winning educational content. All of these are available to our Premium and Pro Members and our licensees.

For your tax return, learn how to calculate the tax basis for sales of company stock from option exercises and restricted stock vesting. Read about this in Ask The Experts (free to all registered users).

How backdating affects taxation and reporting for rank-and-file employees who exercised backdated options in 2006. See the FAQ, free to all registered users of

How do stock grants affect the income limits of Roth IRAs? Find the answer in Life Events: Retirement Plans.

See the new article series on financial planning with ESPPs, in ESPPs: Rules.

How does income from stock options affect payments under disability policies or pension plans? See Life Events: Disability.

Return to table of contents



The alternative minimum tax (AMT) snags many people who exercise/hold incentive stock options (ISOs), along with many taxpayers in certain states with high property and income taxes, such as California, New York, and Massachusetts. At the very least, Congress and the President need to raise again the AMT income exemption amount for 2007. In your AMT calculation, this replaces the personal exemption and standard deduction from the regular-tax system. (See an FAQ on about how AMT is calculated.)

For your 2006 tax returns, the AMT exemption amounts are $42,500 for single taxpayers and $62,550 for married taxpayers filing jointly. Without any extension, the exemption returns in 2007 to the levels of 2000: $33,750 and $45,000. In 2006, Congress and the President faced a similar situation. They eventually extended the exemption again in May 2006, slightly increased it for inflation, and made it retroactive to the beginning of the year. President Bush's budget for the upcoming year proposes a similar one-year patch.

Members of Congress from both major political parties seem serious about reforming the AMT beyond just these temporary measures. (For example, see a recent article on The House Ways and Means Select Revenue Measures Subcommittee has started hearings on the AMT. The hearing on March 7 explored its history and how it has grown to potentially affect 23 million households in 2007. On March 22 the subcommittee will hear about the real-life side of the AMT. Written comments are accepted by the close of business on March 21. A committee staffer has told that their goal is to come up with some type of legislative fix that is more permanent or at least longer-term than the yearly patches. Any fix depends on finding tax revenues to replace what the government gets from current rules.

One idea being floated, at least by Charles Rangel (D-NY), the Chairman of the Ways and Means Committee, involves restructuring the tax cuts of the past few years for the higher income brackets. According to him, this would generate the replacement tax revenues needed to repeal the AMT, or to greatly increase the exemption amounts and index them for inflation. (For details, see an article in US News & World Report.)

For information about the alternative minimum tax, including ways to minimize and manage it, see the subsections AMT  and AMT Advanced on

The Cost-Value Gap And The Case For Personalized Stock Plan Education

Recent research conducted by faculty at the University of Illinois and Michigan State University finds that, on average, executives value their stock option holdings at only 40% of the opportunity cost to the company.  More important, however, is their finding that this universal “cost-value gap” can be closed by providing executives with a program that educates them on the full value of their equity compensation such as StockOpter Personalized Education.

The existence of a cost-value gap means that your shareholders aren’t getting the full value of their equity compensation investment in terms of executive retention and motivation.  For details on this research and its ramifications visit for a white paper entitled Maximizing The Perceived Value Of Equity Compensation.

How significant is the cost-value gap at your company?  For a no-cost assessment, contact Bill Dillhoefer of Net Worth Strategies at 877-728-5964.


Experts from are speaking at the following conferences and meetings during the upcoming months. Please contact to invite our experts to speak at your national conference or local meeting.

NCEO/Beyster Institute 2007 Employee Ownership Conference, San Diego, CA (March 21–23). Session presentation on restricted stock and RSUs. Mention to obtain a small discount on registration to the full conference.

NASPP San Diego Chapter (March 22). Presentation on insider trading education and prevention, including Rule 10b5-1 trading plans.

Financial Planning Association, Northern New England Chapter, Woodstock, VT (May 4, 2007). Presentation: What financial advisors need to know about restricted stock and other trends in equity compensation.

WorldatWork (formerly American Compensation Association) Conference, Orlando, FL (May 6–9). We are exhibiting at booth #349. If you are not attending and want more information on our corporate services for stock plan education and communications, including licensing our content and tools, call 617-734-1979 or email

2007 Computershare Annual Conference: The Source, San Francisco, CA (June 10–13). Presentations on restricted stock and on insider trading.

Return to table of contents



If you found this update from useful, please share it with your friends and colleagues, but do not copy or customize the text itself for your company's use without express permission.

Missed an update? Visit the archives.

TO SUBSCRIBE: Visit and register as a new user. Be sure to check the box next to "Yes! I would like to receive the email newsletter."

TO UNSUBSCRIBE: Sign into the site, go to My Account at the top of any page, uncheck the box next to "Yes! I would like to receive the email newsletter," and click on Update.



Return to table of contents