My W2 Is Showing My Stock as Income
Filing an income tax return requires referring to a variety of financial information accumulated throughout the year, including income information received from your employer on tax form W-2. A W-2 lists all compensation you received from an employer, such as cash pay, property and other taxable fringe benefits. In some cases, stock options granted by an employer are taxable as income and included on form W-2 if you exercise the options or sell stock purchased with the options.
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Stock Option Basics
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A stock option is a form of non-cash compensation that corporations sometimes offer to employees. A stock option gives an employee the opportunity to purchase shares of the company's stock at a certain specified price. If the value of a company's stock goes up after the date it initially sets a price for stock options, employees can choose to "exercise" the option to buy stock at the set price and then sell the shares of stock at the higher price to make a profit.
Nonstatutory Stock Options
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Stock options fall into two general categories: nonstatutory stock options and statutory stock options. According to the IRS, if you receive a nonstatutory stock option that has a readily determinable fair market value when it is granted to you, it is considered taxable compensation for tax purposes and will appear on your W-2. Options have a readily determinable fair market value if the stock is actively traded on an established market. If a stock option does not have a readily determinable fair market value, the difference between the amount you pay for the property and its fair market value when it becomes "substantially vested" is included in your income. A property is "substantially vested" when it is transferable or when it is not subject to a substantial risk of forfeiture.
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Statutory Stock Options
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Statutory stock options, which include incentive stock options (ISOs) are not included in income at the time options are granted or when options are exercised and used to purchase shares of stock. The difference between what you pay for stock under a statutory stock option and the amount that you receive when you sell stock may be taxed as normal compensation and may be included on form W-2 depending on how long you hold the stock before selling it. The IRS states that if you do not sell the stock by the later of the 1-year period after the stock was transferred to you or the 2-year period after the option was granted, the amount you gain does not count as ordinary income and is taxed as a capital gain instead of income.
Considerations
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Income gained from exercising nonstatutory stock options appears in box 12 of form W-2 and is also included in the totals in boxes 1, 3 and 5. Box 1 lists total compensation, box 3 lists compensation subject to Social Security taxes, and box 5 lists compensation subject to Medicare taxes.
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