The following January you notice this additional income in your taxable wages on your Form W-2, as well as the taxes withheld on this income, so you figure as long as you include your W-2 information in your tax return, like you usually do, there is nothing else for you to report.
However, in order to properly report this income in your tax return you will also need to report the sale of stock. Yes, believe it or not, you sold stock. But you can avoid this situation very simply, by reporting the sale of the stock on your tax return.
They then immediately sell the stock — often the same day — with part of the proceeds being used to pay the loan, and the remaining proceeds paid to you through your employer. For Nonqualified Stock Options, the income included in your taxable wages is usually the difference between the stock price when the stock options were offered to you grant price and the fair market value of the stock when purchased exercise price times the number of shares purchased when the options vested.
When this situation occurs, your tax return should include both your W-2 information and the sale of the stock in order to properly report this income in your tax return. Even though the income is included in your W-2 the amount from the exercise of the Nonqualified Stock Options is generally coded V in box 12 , you may also have a gain or loss from the sale of the stock.
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Even if the stock was immediately sold after it was purchased, you likely paid a commission to the brokerage firm, in which case the commission fee would likely represent the loss amount to include in your tax return. Or, if the sales price of the stock was an increase or decrease from the purchase price, then such gain or loss would also need to be included in your tax return.
This information should be reported on Form , which then flows to the Schedule D of your tax return. You should have received a Form B from the brokerage firm that handled the stock sale. In addition, the broker or your employer likely provided you with a statement describing how the gain or loss related to the cashless exercise should be reported in the tax return, or provided you the necessary information to make the calculations in order to determine how to properly report the sale in the tax return.
One word of caution: if the Form B indicates a cost of the stock, it will not include the income included in your taxable wages for stock acquired after ; in this case your cost basis of the stock sold will need to be adjusted in order for you to avoid being taxed on the income twice, once in your taxable wages, and then again on the reporting of the stock sale.
Frank began his career at TaxAudit in as a Return Reviewer. Analyzing thousands of self-prepared tax returns every year for the next five tax seasons exposed him to many complicated areas of the tax code, and he became an expert at spotting the multitude of mistakes that can be made when preparing tax returns.
His current position with the company is Tax Content Developer. In this role, he helps to ensure the soundness of the tax positions taken by our reps in their responses to the IRS and develops tax courses for our continuing education program. He is a member of the Research Team and has been instructing tax classes since With a career in the tax field spanning more than 20 years, Frank has owned and operated his own business, Thomas Tax Service, since This is ordinary wage income reported on your W2, therefore increasing your tax basis in the stock.
Later, when you sell the stock acquired through exercise of the options, you report a capital gain or loss for the difference between your tax basis and what you receive on the sale.
Non-Qualified Stock Options
Stock options can be a valuable employee benefit. However, the tax rules are complex. If you receive stock options, you should talk to your tax advisor to determine how these tax rules affect you. Internal Revenue Service. Accessed Jan. Income Tax. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
Employee stock options from your employer
At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Personal Finance Taxes. Key Takeaways Stock options fall into two different categories: Statutory, granted under purchase plans or incentive stock options plans, and nonstatutory options that come with no plans.
Income results when you sell stocks acquired by exercising statutory stock options, which produces the alternative minimum tax. If you exercise the nonstatutory option, you must include the fair market value of the stock when you acquired it, less any amount you paid for the stock. When you sell the stock, you report capital gains or losses for the difference between your tax basis and what you receive on the sale. Article Sources.
What are employee stock options? How are ESOPs taxed?
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The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Articles. Partner Links. Qualifying Disposition Qualifying disposition refers to a sale, transfer, or exchange of stock that qualifies for favorable tax treatment.