Non-qualified Stock Options

by Chuck Woodson, EA | Dec 17, 2019 | Client Tips, Tax Tips, Uncategorized

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

When does all this happen? When the NQSO is exercised. Most companies use a brokerage firm to handle all these transactions, e.g., E*Trade and Charles Schwab. At the time of the exercise, there is a tax on the difference between the value of the stock on the exercise date and the fixed price of the stock specified in the option itself.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

In the real world, employees get to exercise an option after a certain period of time has passed (vesting schedule). That’s because the employer wants the employee to stick around. Because the price of the stock is fixed, the exercise normally only takes place when the company stock has gone up. When the stock price goes up, there’s a profit. The IRS expects to share in the gain by taxing it.

When does all this happen? When the NQSO is exercised. Most companies use a brokerage firm to handle all these transactions, e.g., E*Trade and Charles Schwab. At the time of the exercise, there is a tax on the difference between the value of the stock on the exercise date and the fixed price of the stock specified in the option itself.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

For today we’re talking about an option granted (given) to the taxpayer by the employer. The option specifies when it can be exercised and price of the shares that are being exercised (bought). Summary: this is an employee benefit and usually found in larger companies as a method of compensation – and that’s key since compensation is taxable.

In the real world, employees get to exercise an option after a certain period of time has passed (vesting schedule). That’s because the employer wants the employee to stick around. Because the price of the stock is fixed, the exercise normally only takes place when the company stock has gone up. When the stock price goes up, there’s a profit. The IRS expects to share in the gain by taxing it.

When does all this happen? When the NQSO is exercised. Most companies use a brokerage firm to handle all these transactions, e.g., E*Trade and Charles Schwab. At the time of the exercise, there is a tax on the difference between the value of the stock on the exercise date and the fixed price of the stock specified in the option itself.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

A stock option, in general, is something a taxpayer can posses that allows the purchase of a stock of a company. To get possession of the stock, the taxpayer must exercise the option, which simply means they buy the stock under the terms of the option.

For today we’re talking about an option granted (given) to the taxpayer by the employer. The option specifies when it can be exercised and price of the shares that are being exercised (bought). Summary: this is an employee benefit and usually found in larger companies as a method of compensation – and that’s key since compensation is taxable.

In the real world, employees get to exercise an option after a certain period of time has passed (vesting schedule). That’s because the employer wants the employee to stick around. Because the price of the stock is fixed, the exercise normally only takes place when the company stock has gone up. When the stock price goes up, there’s a profit. The IRS expects to share in the gain by taxing it.

When does all this happen? When the NQSO is exercised. Most companies use a brokerage firm to handle all these transactions, e.g., E*Trade and Charles Schwab. At the time of the exercise, there is a tax on the difference between the value of the stock on the exercise date and the fixed price of the stock specified in the option itself.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

Hmmmmm. What do you mean “exercised”? Let’s step back and provide some background.

A stock option, in general, is something a taxpayer can posses that allows the purchase of a stock of a company. To get possession of the stock, the taxpayer must exercise the option, which simply means they buy the stock under the terms of the option.

For today we’re talking about an option granted (given) to the taxpayer by the employer. The option specifies when it can be exercised and price of the shares that are being exercised (bought). Summary: this is an employee benefit and usually found in larger companies as a method of compensation – and that’s key since compensation is taxable.

In the real world, employees get to exercise an option after a certain period of time has passed (vesting schedule). That’s because the employer wants the employee to stick around. Because the price of the stock is fixed, the exercise normally only takes place when the company stock has gone up. When the stock price goes up, there’s a profit. The IRS expects to share in the gain by taxing it.

When does all this happen? When the NQSO is exercised. Most companies use a brokerage firm to handle all these transactions, e.g., E*Trade and Charles Schwab. At the time of the exercise, there is a tax on the difference between the value of the stock on the exercise date and the fixed price of the stock specified in the option itself.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

Non-qualified stock options [NQSO] can be a complex area of tax preparation. Why are they called non-qualified? Because they are immediately subject to tax when exercised.

Hmmmmm. What do you mean “exercised”? Let’s step back and provide some background.

A stock option, in general, is something a taxpayer can posses that allows the purchase of a stock of a company. To get possession of the stock, the taxpayer must exercise the option, which simply means they buy the stock under the terms of the option.

For today we’re talking about an option granted (given) to the taxpayer by the employer. The option specifies when it can be exercised and price of the shares that are being exercised (bought). Summary: this is an employee benefit and usually found in larger companies as a method of compensation – and that’s key since compensation is taxable.

In the real world, employees get to exercise an option after a certain period of time has passed (vesting schedule). That’s because the employer wants the employee to stick around. Because the price of the stock is fixed, the exercise normally only takes place when the company stock has gone up. When the stock price goes up, there’s a profit. The IRS expects to share in the gain by taxing it.

When does all this happen? When the NQSO is exercised. Most companies use a brokerage firm to handle all these transactions, e.g., E*Trade and Charles Schwab. At the time of the exercise, there is a tax on the difference between the value of the stock on the exercise date and the fixed price of the stock specified in the option itself.

Example: Joe has a NQSO that allows him to exercise the option (buy the stock) for a fixed price of $5/share. When the exercise takes place, the company stock has a value of $20/share. The difference (aka the spread) is taxable ‒ $15/share. If Joe exercises 100 shares, he has a gain of $1,500. Joe now has compensation of $1,500 added to his W-2, box 1. His W-2 will also show Code V in Box 12.

Joe is subject to income tax, social security and medicare tax and any appropriate state taxes. Because Joe has to pay them, he will have 2 choices: Pay for them out of his other funds or sell enough of the exercised stock to cover the taxes.

Most employees choose to sell shares. Because a brokerage firm usually handles this transaction (known as a same day trade because the exercise and sale happen on the same date). The brokerage firm then provides a Form 1099-B (often part of a consolidated 1099 statement that includes 1099-INT, 1099-DIV, and 1099-B information).

Here’s the problem: The basis reported by the brokerage firm only includes the amount Joe paid for the shares – 100 shares @ $5/share = $500. But Joe paid taxes on the spread ($1,500) and that is also part of his basis. When making inputs in the software, you must adjust the basis to include both the spread and the cost of the purchase.

There is usually a small fee charged by the broker, so the real bottom line of the transaction is usually a small loss equal to the fee. The transaction will also be short term since holding period is the time between exercise and disposition – and that usually happens the same date.

This is a relatively brief summary, but you get the picture. There’s always going to be something missing in the 1099-B basis. Don’t forget – these transactions are all covered transactions so the IRS will get the “wrong” basis.

Chuck Woodson, EA

Chuck became a tax preparer in 1976 and an Enrolled Agent in 1981. Chuck specializes in trust and estate tax returns. He served as a QA team member for Intuit on multiple professional tax software programs. Chuck has been writing curriculum and teaching taxes to the pros since 1978.

Charitable Contributions

by Chuck Woodson, EA | Dec 12, 2019 | Client Tips, Tax Tips, Uncategorized

Chuck Woodson, EA

Chuck became a tax preparer in 1976 and an Enrolled Agent in 1981. Chuck specializes in trust and estate tax returns. He served as a QA team member for Intuit on multiple professional tax software programs. Chuck has been writing curriculum and teaching taxes to the pros since 1978.

California Health Care Mandate

by Chuck Woodson, EA | Dec 4, 2019 | Client Tips, Tax Tips, Uncategorized

Chuck Woodson, EA

Chuck became a tax preparer in 1976 and an Enrolled Agent in 1981. Chuck specializes in trust and estate tax returns. He served as a QA team member for Intuit on multiple professional tax software programs. Chuck has been writing curriculum and teaching taxes to the pros since 1978.