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Incentive Stock Options: Tax Return Tips and Tricks Part One

Incentive Stock Options: Tax Return Tips and Tricks Part One

 

Are your options fencing you in?

Tax season is upon us and with the variety of stock options being so plentiful, it is important to understand how to go about filing a tax return that fits the parameters of your stock option type. Today, we focus on incentive stock options and learn how to report all necessary tax information.

Incentive Stock Options: Grant – Keep in mind that if you have been granted incentive stock options but have not exercised the options, that there is nothing to report on a tax return and you have no obligation to report any data to the IRS in this way.

Incentive Stock Options: Exercise – If you exercise your incentive stock options and are not affected by the alternative minimum tax, then your requirements will remain unchanged. Additionally, an individual company will report all incentive stock options that are exercised in the past year on IRS form 3921 in the New Year.

Incentive Stock Options: Sale – Taxes on an incentive stock options sale, gift or transfer will be determined by holding periods or disqualifying dispositions. If you sold your shares after a predetermined holding period was fulfilled you can report your sale as though all transactions were conducted in the open market. Any capital gains and/or losses will be determined by calculating the difference between your exercise and sale prices. Keep in mind that any long term gains (held for 12 months or more) will be taxed 15%. A disqualifying disposition occurs if you get rid of your incentive stock option shares before fulfilling the incentive stock option holding period. There are ways to report this instance if you gifted, sold or transferred your incentive stock options to an individual that is not a direct relative. Please see below.

  • Did you make money? Were your shares sold at a rate higher than the original purchase price and the value of the shares at the time you exercised them? If you answered yes, then you must determine your income from that sale and report it as compensation income. Anything additional is considered a capital gain and must be reported as such.
  • Did you break even? If you sold your incentive stock option shares for more than you originally paid but for less than the value of the share at the time you exercised your options, then consider all profit to be compensation income and report that number and the sale on your 8949 tax form.
  • Did you lose money? If you lost money in the sale of your incentive stock option shares, report all losses as capital loss on the appropriate forms.

In our next blog post, we will continue our series on tax return tips and tricks by introducing alternative minimum taxes and how to properly calculate and report a qualifying tax rate.  Be sure to check back and let us know if we have helped you understand your incentive stock options and their associated reporting requirements.

Stock Connections specializes in working with San Francisco Bay Area companies that are involved in mergers & acquisitions, are raising capital, or creating stock option or other equity plans. We help start-up, private and public firms become – and remain – SEC-compliant. Stock Connections’ services are designed to help both start-ups and established firms comply with SEC and other regulations in their equity compensation programs. If you or anyone you know is looking to get involved with any of the above, we encourage you to contact us today!

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