This form will report important dates and values needed to determine the correct amount of capital and ordinary income if applicable to be reported on your return.
How Stock Options Are Taxed & Reported
Employee Stock Purchase Plan - After your first transfer or sale of stock acquired by exercising an option granted under an employee stock purchase plan, you should receive from your employer a Form , Transfer of Stock Acquired Through an Employee Stock Purchase Plan under Section c.
This form will report important dates and values needed to determine the correct amount of capital and ordinary income to be reported on your return. If your employer grants you a nonstatutory stock option, the amount of income to include and the time to include it depends on whether the fair market value of the option can be readily determined. Readily Determined Fair Market Value - If an option is actively traded on an established market, you can readily determine the fair market value of the option.
Refer to Publication for other circumstances under which you can readily determine the fair market value of an option and the rules to determine when you should report income for an option with a readily determinable fair market value. Not Readily Determined Fair Market Value - Most nonstatutory options don't have a readily determinable fair market value.
For nonstatutory options without a readily determinable fair market value, there's no taxable event when the option is granted but you must include in income the fair market value of the stock received on exercise, less the amount paid, when you exercise the option. You have taxable income or deductible loss when you sell the stock you received by exercising the option.
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You held the stock for less than two years after the option was granted to you. Report stock sale profits as a capital gain or report losses as a capital loss if both of these apply: You held the stock you bought for more than one year when you exercised the option. You held the stock for two or more years after the option was granted to you. The form will include: Name of the stock Number of shares sold Price you sold the stock for Your net proceeds in most cases Read the B to see if the expenses related to the sale were excluded from the reported proceeds.
Learn About Incentive Stock Options and the Taxes
To learn more, see the Sale Expenses tax tip. To learn more, see Publication Taxable and Nontaxable Income at www. To learn more, see Form instructions at www. No matter how you file, Block has your back.
File with a tax pro File online. A qualifying disposition of ISOs simply means that the stock, which was acquired through an incentive stock option, was disposed more than two years from the grant date and more than one year after the stock was transferred to the employee usually the exercise date. An additional qualifying criteria is that you must have been continuously employed by the employer granting the ISO from the grant date up to 3 months prior to the exercise date. Exercising an ISO is treated as income solely for the purpose of calculating the alternative minimum tax AMT , but is ignored for the purpose of calculating the regular federal income tax.
The fair market value is measured on the date when the stock first becomes transferable or when your right to the stock is no longer subject to a substantial risk of forfeiture.
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This inclusion of the ISO spread in AMT income is triggered only if you continue to hold the stock at the end of the same year in which you exercised the option. If the stock is sold within the same year as exercise, then the spread does not need to be included in your AMT income. A qualifying disposition of an ISO is taxed as a capital gain at the long-term capital gains tax rates on the difference between the selling price and the cost of the option. Disqualifying ISO dispositions are taxed in two ways:. Be aware that employers are not required to withhold taxes on the exercise or sale of incentive stock options.
Accordingly, persons who have exercised but not yet sold ISO shares at the end of the year may have incurred alternative minimum tax liabilities. And persons who sell ISO shares may have significant tax liabilities that may not necessarily be paid for through payroll withholding. Taxpayers should send in payments of estimated tax to avoid having a balance due on their tax return.
You may also want to increase the amount of withholding in lieu of making estimated payments. Incentive stock options are reported on Form in three possible ways:. Increase your AMT income by the spread between the fair market value of the shares and the exercise price. This can be calculated using data found on Form provided by your employer. The calculated spread is reported on Form Because you are recognizing income for AMT purposes, you will have a different cost basis in those shares for AMT than for regular income tax purposes.