Exercise shares (W2 & 1099B)

[ILLMAS]

When someone exercise shares and receives the sales proceeds as taxable compensation, are they also supposed to receive a 1099B for the same proceeds?  TP exercised $20K, it was included in TP wages and had withholdings and also received a 1099B with 20K in sales & 10K in cost, in an ordinary situation would seem this person is paying reporting the income twice, however I wanted to ask if I need to mark off anything to indicate it's certain type of stock option plan?  The form 1099B is very plain and this is the first time I have encountered this.

Thanks

MAS

[BHoffman]

What shows on the W2 box 12 code V?

[ILLMAS]

The $20K

[ILLMAS]

I entered the 1099B sale of stock on Sch D, Short-term, Sales Price $20K, Cost $10K, Gain $10K, I know there were withholdings on the 20K reported as wages, but the 10K is also being taxed, this is the part I having trouble with. 

From this example, it appears they are making the cost the same as the sales price.

2. Exercise your option to purchase the shares, and then sell those shares within the same calendar year

Grant date	12/31/2014
Exercise date	06/30/2015
Exercise price	$20
Sale date	06/30/2015
Sale price	$45
Number of shares	100
Bargain element	$2,500

The bargain element is the difference between the exercise price and the market price on the day you exercised the options and purchased the stock ($45 - $20 = $25 x 100 shares = $2,500). This amount should already be included in the total wages reported in Box 1 of your 2015 Form W-2 because this is a disqualifying sale (meaning you are disqualified from taking it as a capital gain and being taxed at the lower capital gains rate because you sold the shares less than a year after exercising the option). If this amount is not included in Box 1 of Form W-2, add it to the amount you're reporting on your 2015 Form 1040, line 7.

Report the sale on your 2015 Schedule D, Part I as a short-term sale. The sale is short-term because not more than one year passed between the date you acquired the actual stock and the date you sold it. For reporting purposes on Schedule D:

• The date acquired is 6/30/2015
• The date sold is also 6/30/2015
• The cost basis is $4,500.This is the actual price paid per share times the number of shares ($20 x 100 = $2,000), plus any amounts reported as compensation income on your 2015 tax return ($2,500)
• The sales price is $4,500 ($45 x 100 shares). This should match the gross amount shown on your 2015 Form 1099-B you receive from your broker after the end of the year.

You end up reporting no gain or loss on the stock sale transaction itself, but the $2,500 overall profit will be taxed at your ordinary tax rate. Because you exercised the options and sold the stock in the same year, you do not need to make an adjustment for Alternative Minimum Tax purposes.

 

[BHoffman]

https://turbotax.intuit.com/tax-tools/tax-tips/Investments-and-Taxes/Non-Qualified-Stock-Options/INF12046.html

See the link for a nice description of how to deal with this.  There are details as to when the client exercised the options and when the client sold the stock,  

[BHoffman]

If the client exercised the option and then sold the stock short term, the cost basis and the sale proceeds for reporting on Sch D will be either the same or will show a small loss due to commissions.  The income is reported on the W2.  The 1099B works out to be a wash.

 

 

[BHoffman]

One more thing - you will need to show an adjustment to the cost basis on the Sch D.

[ILLMAS]

7 minutes ago, BHoffman said:

One more thing - you will need to show an adjustment to the cost basis on the Sch D.

To bring the cost to sales price, correct?

[BHoffman]

 

On what day did the client exercise his option?  If it's the same say he sold the stock then the basis will equal the sale price.  I'm sorry I just assumed this was the case.

 If he exercised the option and held the stock for less than a year before selling it, he might have a gain or a loss but we don't know without more information:  His exercise date, exercise price, number of shares exercised, market price on the exercise date, sales date, sales price, and number of shares sold.  Sometimes the employer will give the client a letter with this information.

[BHoffman]

Here is an example where the client exercised the option and then held the stock for less than one year before selling:

From this link:  https://turbotax.intuit.com/tax-tools/tax-tips/Investments-and-Taxes/Non-Qualified-Stock-Options/INF12046.html

 

Exercise date:	6/30/2015
Exercise price:	$25
Market price on 6/30/2015:	$45
Sales date:	12/15/2015
Sales price:	$50
Commission paid at sale:	$10
Number of shares:	100

Again, the compensation element of $2,000 (calculated as in the previous examples) is considered taxable income and should be included in Box 1 of your 2015 Form W-2. If not, you must add it to Form 1040, Line 7 when you fill out your 2015 tax return.

Because you sold the stock, you must report the sale on your 2015 Schedule D.

The stock sale is considered a short-term transaction because you owned the stock less than a year. In this example, the date acquired is 6/30/2015, the date sold is 12/15/2015, the sales price is $4,990, and the cost basis is $4,500. The short term capital gain is the difference of $490 ($4,900-$4,500). How did we get these figures?

• The sales price ($4,990) is the market price at the date of sale ($50) times the number of shares sold (100), or $5,000, less any commissions you paid when you sold it ($10). The Form 1099-B from the broker handling your sale should report $4,990 as the proceeds from your sale.
• The cost basis is the actual price you paid per share times the number of shares ($25 × 100 = $2,500), plus the compensation element of $2,000 for a total of $4,500. So the gain is $490, the difference between your basis and the sales price, and will be taxed as a short-term capital gain at your ordinary income tax rate

[Lion EA]

Add the W-2 amount on which he already paid tax as ordinary income/compensation to the cost basis on Form 1099-B to get his real cost basis.  Do the adjustment in your software, so it shows up in the right column.  His basis ends up being what he paid for it PLUS what he was taxed on via payroll.  Then compute gain/loss in the usual manner.

[SaraEA]

I think what confused you ILLMAS (if not the links above!) is that the 1099B shows the wrong cost basis.  Look to see that it says "cost basis NOT reported to IRS," which it should say because the broker has no idea how much the employer included in wages.  The client's cost basis is the amount paid for the stock plus the amount included in wages. If sold the same day or thereabouts, the result is usually a wash or a small loss, which is the broker's commission.  (The commission gets added to basis too.)  I have a client who gets about $300k added to wages from restricted stock options each year.  And every year he gets a loss of $45 that the broker charged.

[BHoffman]

I don't think the 1099B cost basis figures in.

 

On the exercise date, the taxable income on the W2 is the difference between the FMV of the stock that day - the exercise price = the bargain element.  

On the sale date, the cost basis is the amount he actually paid for the stock at the exercise date plus the bargain element.

An equation would look like this:  Cost basis = Exercise Price + (FMV - Exercise Price).

FMV = 45

Exercise Price = 25

Bargain element = 20

Sale Price = 50

His W2 would show the bargain element of $20.

The 1099B would show the sale price of $50.

The cost basis would be:  Exercise price $25 + Bargain element $20 = $45

Sale price $50 - Cost basis $45 = $5 S/T gain.

If he sold it on the exercise date, the FMV would be the same as the Sale Price and there would be no gain or loss.  He would be taxed only on the bargain element in his W-2.

 

 

 

 

[BHoffman]

Yeah...what SaraEA said.

[Lion EA]

His cost basis is what he paid for the stock.  In this case, he paid for it in two ways:  a check he wrote the broker/what the broker withheld in a same-day sale/what the broker knew and reported on 1099-B PLUS what was included in his compensation/already taxed income.  Not much different than if he bought the stock in two different lots on two different dates but sold all at one time.  Just add together everything it cost him to acquire the stock.