How to Report Stock Options on a Tax Return

Report stock options on the IRS 1040 form.

Filling out federal tax forms can be confusing without the added complication of stock options. However, when you sell your stock options, you must report any income gains or losses resulting from the sale on your federal tax returns. You must learn how to report the stock options on a tax return properly, or you may find yourself owing a large sum of back taxes or getting an audit notice from the IRS.

Things You'll Need

• W-2 form
• IRS 1040 form
• IRS 1040 Schedule D
• Form 1099-B

Instructions

1. Enter your income information on Form 1040 from the IRS. You pull this information from your W-2 form. In Box 1 of the W-2, marked "Wages, tips, other compensation", the amount includes your salary as well as any gains from the sale of your stock options. Enter this amount on Line 7 on the first page of Form 1040.

2. Report short-term capital gains or losses on IRS 1040. If you bought stock options and sold them less than one year later, this is a short-term capital gain or loss. You will be using Part 1 of the Schedule D in Steps 5 through 8 for reporting your stock options on your tax returns.

3. Report long-term capital gains or losses from the sale of stock options on IRS 1040 Schedule D. If you bought stock options and sold them over a year later, this is a long-term capital gain or loss.You will be using Part 2 of the Schedule D in Steps 5 through 8 for reporting your stock options on your tax returns.

4. Gather your stock option information so you can input the correct information. Get your 1099-B and information relating to the stock option purchase date, sale date, purchase price and sale price.

5. Fill in columns A through C on the Schedule D form. Columns A through C ask for basic information regarding your stock options. In column A, enter how many shares you sold as well as the company's stock ticker symbol. In column B, input the date you bought the stock options. Enter the date you sold your options in Column C.

6. Fill in column D on the Schedule D form. Enter the price for which you sold your shares, minus any broker fees or other costs. You will find this amount on the 1099-B form you received from your broker.

7. Calculate your cost basis for column E. To calculate your cost basis, multiply your option price by the number of shares you sold. Next, add the income from the sale reported on your W-2 form to your cost basis. Enter that total amount in column E.

8. Calculate gains or losses for column F. To calculate the gain or loss from the sale of your stock options, simply subtract the number you entered in column E from the number you entered in column D. If you made money from the sale, it is a gain. If you lost money from the sale, it is a loss. Enter your gain or loss in column F.

Tips & Warnings

• When reporting stock options on a tax return, make sure you are up-to-date on any current tax year law changes.

• If you are not confident reporting stock options on a tax return, get your taxes done by a professional. This can avoid costly IRS fines or penalties as a result of reporting mistakes.

References

• ETrade Financial: Understand the Basics of Stock Plan Taxation
• Tax Guide for Investors: Sale of Stock From Non-qualified Options