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Exercise and sale of nonstatutory stock options

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Level 3

I’m confused on how to report non-statutory stock options on the 1040.

My client exercised his option to buy company stock and then sold the stock the same day. His W-2 shows Code V in box 12 for $10,712.64. I have no problem with the W-2. But I also have a 1099-B from the brokerage firm who handled the sale and the sale price ($18,922.77) minus cost basis ($10,229.70) shows gain of $8693.07. I assume I must include the 1099B info on Schedule D but it seems like this is reporting the gain twice? What am I missing?

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Employee
Employee

The employee stock reporting rules in many cases require brokers to report a basis that does NOT include the basis they get for the recognized income on W2. When you have this situation, all you have to do is report the sale from 1099B as you normally would, but then enter the "Corrected basis" which includes the W2 income. End result of same-day sales like this is typically a very small loss due to broker fees.

Just FYI, any time you have clients who sell stock acquired from their employer, it's always a good idea to compare the reported basis against the actual stock price on the acquisition date. If the reported basis doesn't fall within the daily trading range for that stock (times number of shares sold, of course), then you most likely have a situation where compensation on the W2 hasn't been added to basis, and you should ask your client if they have additional details about the sale that would show the compensation income from when they received the shares. Some brokers include this in supplemental info at the end of the same year-end document that includes the 1099-B; but many put this in a separate document that the taxpayer might not know to look for.

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6 Replies 6
Highlighted
Employee
Employee

The employee stock reporting rules in many cases require brokers to report a basis that does NOT include the basis they get for the recognized income on W2. When you have this situation, all you have to do is report the sale from 1099B as you normally would, but then enter the "Corrected basis" which includes the W2 income. End result of same-day sales like this is typically a very small loss due to broker fees.

Just FYI, any time you have clients who sell stock acquired from their employer, it's always a good idea to compare the reported basis against the actual stock price on the acquisition date. If the reported basis doesn't fall within the daily trading range for that stock (times number of shares sold, of course), then you most likely have a situation where compensation on the W2 hasn't been added to basis, and you should ask your client if they have additional details about the sale that would show the compensation income from when they received the shares. Some brokers include this in supplemental info at the end of the same year-end document that includes the 1099-B; but many put this in a separate document that the taxpayer might not know to look for.

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Level 3

What does the Code V on the W-2 represent? Is this $10,712.64  the gain? If so, the gain on the W-2 doesn't come close to the gain on the 1099B which is $8,693.07. I'm still confused.

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Level 10
Level 10

The amount with code v has been added to box 1 on the W2 and is his basis

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Level 3

Okay, I finally get it. Thank you.

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Level 10
Level 10

Forgot to say there should be very little gain you need to put a correction in for brokers reported basis

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Level 2

The taxpayer pays the tax on the difference between the strike price and the market value on the date they exercise the option. That is included on their W-2.

If they sell the stock simultaniouly, then their selling price and their cost basis should be the same, and yes you would report the transaction on form 8949.