How to Report Employee Stock Options
Many employees receive stock options from their companies as an incentive to align the employee's goals and actions with the company's goals. Theoretically, employees contributing to the overall well-being of a company also contribute to a rising stock price that they can benefit from via stock options. However, reporting employee stock options can be a little bit tricky.
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Instructions
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1
Determine which stock options have been exercised and the stock received subsequently sold. Only exercised stock options are reportable to the IRS. They are not reportable while the stock is held, only after the stock received from exercising the options has been sold.
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2
Calculate the gain or loss for each stock option. The gain/loss is equal to the proceeds received from the sale of the stock minus the amount paid to exercise the option (basis). In the case of a cashless exercise, the amount of money received is the gain.
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3
Calculate how long you held the stock after exercising the option. If you held the stock for more than one year, then report the gain or loss on IRS Form 1040 Schedule D along with other investment gains. This completes your reporting requirements.
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4
Calculate how long you held the stock option prior to exercising it if you held it for less than one year. If you were granted the option at least two years prior to exercising it, then report the gain or loss on the transaction on IRS Form 1040 Schedule D. This completes your reporting requirements.
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Report the whole loss on IRS 1040 Schedule D as a capital loss if you have a loss and neither Step 3 nor Step 4 applies.
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Report the difference between the exercise price and the market price on the day of exercise as ordinary income on Line 7 of IRS 1040 if you have a gain and neither Step 3 nor Step 4 applies. Report any additional gain as a capital gain on IRS Form 1040 Schedule D.
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Tips & Warnings
When deciding whether to exercise employee stock options, it is almost always best to wait until the two-year holding period following the grant elapses.
This article is general background information and is not specific tax advice. Always consult a tax professional for specific advice.
