How to Report Incentive Stock Options
Many companies offer employees stock options to allow them to share in the company's success. Incentive stock options are by definition statutory stock options, according to the Internal Revenue Service (IRS). Knowing this removes the significantly more difficult part of determining whether the options are statutory or nonstatutory. Still, knowing just how to report stock options is important to minimize any tax effect and prevent errors.
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Instructions
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1
Record the date and amounts of all stock option grants but do not report them or include any information about them on your tax forms until you exercise them. Incentive stock options are not reportable when granted.
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2
Record the date and amounts of any stock options that are exercised, but do not report any information regarding the exercise of the options if the stock is not sold during the tax year. In other words, if you exercise your options but do not sell the stock you receive, then there is no reportable event.
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3
Calculate how long you held the stock and how long you held the options. If you held the stock for more than one year after exercising the options or it has been two years since the options were granted to you, then proceed to Step 4. If you did not meet either of those two holding periods or sell the stock to satisfy conflict of interest requirements, then skip to Step 6.
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4
Calculate your gain or loss upon the stock sale. The gain or loss is the difference between the amount paid to exercise the options and the amount received from the sale.
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5
Report the gain or loss as a capital gain or loss on Form 1040, Schedule D.
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6
Report on Schedule D if the holding period was not satisfied and the sale of the stock results in a loss. This turn of events makes the entire a loss a capital loss and therefore reportable on Schedule D. If the sale of stock results in a gain, then the difference between the market value (stock price x number of shares) and the cost of exercising the options (stock option price x number of shares) counts as ordinary income and must be reported as wages on line 7 of Form 1040. Any additional gain is a capital gain and is reported on Schedule D.
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Tips & Warnings
It is usually in the taxpayer's best interest to wait until the holding period is satisfied prior to selling any stock received from the exercise of stock options.
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