ESPPs: Taxes Advanced.
If you sold shares during the calendar year, your brokerage firm will issue IRS Form 1099-B by mid-February of the following year. This is an important document that you must have to complete your tax return for the year of sale. Many brokerage firms reformat Form 1099-B into their own substitute statement, which they issue instead of the actual IRS form. The IRS also receives the reported information and will match it against the information you provide on Form 8949 and Schedule D of your tax return.
Significant Changes In The Reporting On Form 1099-B.
A few years ago, Form 1099-B changed to require more details about stock sales. For sales of shares acquired on or after January 1, 2011, stockbrokers have had to report to you the stock acquisition dates, your tax basis (i. e. the cost basis), and whether capital gains were long - or short-term. Before then, only the gross sales proceeds had to be reported on Form 1099-B after stock had been sold during the year. This additional information can be helpful, though it can be confusing instead.
The 1099-B for stock sales made during 2017 closely resembles the version for the 2016 tax year. However, the 2014 version introduced some major changes that you should continue to keep in mind when reviewing your 1099-B for stock sales in 2017:
In 2014, the IRS redesigned the form to match its box numbers with the columns on Form 8949, which you use to report stock sales. A box at the top center of Form 1099-B indicates the appropriate box to check near the top of Form 8949 when reporting the sale. The proceeds that your broker reports must be net of commissions and fees. A box (Box 1g) was added for adjustments. Do not confuse this with the adjustments needed for stock compensation that are discussed below . Box 1g applies only to the amount of any nondeductible loss in a wash sale or to the amount of accrued market discount.
Special Issues For Stock Compensation.
The regulations and the 1099-B instructions continue to evolve. Starting with grants made on or after January 1, 2014, brokers are prohibited from including equity compensation income in the basis reported on Form 1099-B (see pages 29–30 of the final regulations, issued in 2013). Your broker will report only what you paid for the stock at exercise, purchase, or vesting. For grants made before that date, your brokerage firm can voluntarily report the adjusted full basis information with the compensation element. In any supplemental information that it gives, your broker may include the portion of the full basis not reported to the IRS.
Evolution Of Cost-Basis Reporting On IRS Form 1099-B.
What You Need To Know For Stock Sales Made In 2017.
For 2017 sales of company stock acquired from equity compensation and ESPPs, brokers can either (1) report the complete cost basis for pre-2014 grants, while reporting only the partial basis for later grants, or (2) report the unadjusted partial basis for all grants. Therefore, you will need to do the following:
1. Understand what is or is not on the 1099-B sent to the IRS. If this is not clearly explained, ask your company and its stock plan service provider (i. e. broker) whether any compensation income was included in the basis.
2. Make an appropriate adjustment in the gain or loss from the sale on Form 8949 and Schedule D if the compensation part of the basis is not included on Form 1099-B. In IRS Form 8949 and Schedule D, you use column (g) to make this adjustment (you report the basis given on Form 1099-B and adjust it indirectly through that column).
Especially Confusing For Restricted Stock And RSUs.
The final regulations carve out an exception for stock that is not acquired for cash, i. e. what is technically called a noncovered security. This means that for restricted stock and RSUs, and perhaps also the exercise of SARs, the part of the tax basis that equals compensation income recognized is not reported to the IRS: the 1099-B cost-basis information submitted to the IRS will have a blank space or $0 for these grants. Only the exercise/purchase price of stock options or ESPP stock acquired in 2011 or later must have its basis reported.
Alert: Since your brokerage firm cannot include the compensation part of your cost basis on Form 1099-B for sales of stock acquired from grants made in 2014 or later, it is likely that either the cost basis reported in Box 1e will be too low or Box 1e will be blank. To avoid overpaying taxes, you must adjust the gain/loss on Form 8949 and Schedule D or, if Box 1e for the basis is blank, simply report the correct basis.
You don't need to get a corrected Form 1099-B from your broker, as the reporting is following the IRS rules. For additional information, including more details on the cost basis and some tax-return tips, see the related article about these topics and issues. See also the FAQs about avoiding some of the biggest tax-return mistakes with stock options, restricted stock/RSUs, ESPPs, and SARs.
Examine Standing Orders.
In light of the changes in cost-basis reporting, consider whether to modify any default standing order in your account for the shares to use at sale. This is particularly important for stock you have acquired from option exercises, restricted stock/RSU vesting, or market purchases at various times (i. e. the tax basis varies). Otherwise, the default order will automatically be "first in, first out" (FIFO) when you sell the company stock.
Under the procedural rules that brokers must follow, a standing order can be changed only up to the settlement date. Previously, you could get away with just indicating the sold shares on your tax return. While you may find it better to tell your broker to deliver the shares with the highest cost basis to minimize the taxes, when you have ISO and ESPP shares this could cause unwanted tax consequences with an ISO disqualifying disposition or an ESPP disqualifying disposition. You should discuss this with your own advisor.

How to Report Stock Options to the IRS.
A stock option is a right to purchase shares of company stock at a predetermined price, usually within a specified time frame. Options are normally granted as perquisites to employees, either in recognition for service or as a means of retaining key employees. The taxation involved in the execution and disposition of options can get quite challenging, and may require the assistance of a tax adviser.
Determine which type of stock option you have. The two main types of options granted to employees are nonqualified stock options (NQSOs) and incentive stock options (ISOs). Tax treatment is generally more favorable to ISOs. For either type, you do not have to report anything to the Internal Revenue Service (IRS) when your employer grants you the options.
Exercise your options. When you exercise an option, you transform your right to purchase stock into an actual purchase at the specified price. For NQSOs, you will be taxed on what is known as the compensation element, or the difference between your exercise price and the current market price of the shares. For example, if you have a NQSO allowing you to purchase stock at $30, and the stock currently trades at $50, your compensation element is $20 per share. This amount will be reported to the IRS on your year-end W-2 form as taxable compensation, subject to ordinary income tax. For ISOs, there are no immediate income tax consequences from exercising options, although you do have to include the compensation element in your calculations to determine the Alternative Minimum Tax (AMT).
Sell or retain the shares. What you do with the stock you purchase will determine if you have to pay additional taxes. If you simply keep the shares you purchase, for both ISOs and NQSOs, there are no further immediate tax consequences. However, if you sell the stock, then you are triggering a capital gain or loss, much as you would if you sold shares acquired in any other manner.
Determine if you have a disqualifying disposition. For ISOs, if you hold the shares for at least one year after exercising your option and two years after the original grant date, any subsequent sales qualify for favorable capital gains treatment, according to TurboTax. Sales in a shorter period are known as disqualifying dispositions, which disallows capital gains treatment. In a disqualifying disposition, your compensation element will be included on your W-2 as ordinary income, much as with a NQSO. For qualifying dispositions, the compensation element remains untaxed.
Complete Schedule D for any stock sales. As with any stock sale, you must report a gain or a loss when you sell stock received from exercising options. Stocks held for longer than one year qualify as long term, while those sold in one year or less are considered short term.
tax_calculator.
References.
About the Author.
After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.
Photo Credits.
business charts with us money image by Andrew Brown from Fotolia.
Related Articles.
More Articles.
Copyright © Leaf Group Ltd., all rights reserved.

Are stock options reported to irs

If you receive an option to buy stock as payment for your services, you may have income when you receive the option, when you exercise the option, or when you dispose of the option or stock received when you exercise the option. There are two types of stock options:
Options granted under an employee stock purchase plan or an incentive stock option (ISO) plan are statutory stock options . Stock options that are granted neither under an employee stock purchase plan nor an ISO plan are nonstatutory stock options .
Refer to Publication 525, Taxable and Nontaxable Income , for assistance in determining whether you've been granted a statutory or a nonstatutory stock option.
Statutory Stock Options.
If your employer grants you a statutory stock option, you generally don't include any amount in your gross income when you receive or exercise the option. However, you may be subject to alternative minimum tax in the year you exercise an ISO. For more information, refer to the Form 6251 (PDF). You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don't meet special holding period requirements, you'll have to treat income from the sale as ordinary income. Add these amounts, which are treated as wages, to the basis of the stock in determining the gain or loss on the stock's disposition. Refer to Publication 525 for specific details on the type of stock option, as well as rules for when income is reported and how income is reported for income tax purposes.
Incentive Stock Option - After exercising an ISO, you should receive from your employer a Form 3921 (PDF), Exercise of an Incentive Stock Option Under Section 422(b) . This form will report important dates and values needed to determine the correct amount of capital and ordinary income (if applicable) to be reported on your return.
Employee Stock Purchase Plan - After your first transfer or sale of stock acquired by exercising an option granted under an employee stock purchase plan, you should receive from your employer a Form 3922 (PDF), Transfer of Stock Acquired Through an Employee Stock Purchase Plan under Section 423(c) . This form will report important dates and values needed to determine the correct amount of capital and ordinary income to be reported on your return.
Nonstatutory Stock Options.
If your employer grants you a nonstatutory stock option, the amount of income to include and the time to include it depends on whether the fair market value of the option can be readily determined .
Readily Determined Fair Market Value - If an option is actively traded on an established market, you can readily determine the fair market value of the option. Refer to Publication 525 for other circumstances under which you can readily determine the fair market value of an option and the rules to determine when you should report income for an option with a readily determinable fair market value.
Not Readily Determined Fair Market Value - Most nonstatutory options don't have a readily determinable fair market value. For nonstatutory options without a readily determinable fair market value, there's no taxable event when the option is granted but you must include in income the fair market value of the stock received on exercise, less the amount paid, when you exercise the option. You have taxable income or deductible loss when you sell the stock you received by exercising the option. You generally treat this amount as a capital gain or loss. For specific information and reporting requirements, refer to Publication 525.

About Form 3921, Exercise of an Incentive Stock Option Under Section 422(b)
More In Forms and Instructions.
Corporations file this form for each transfer of stock to any person pursuant to that person's exercise of an incentive stock option described in section 422(b).
Current Products.
Recent Developments.
Other Items You May Find Useful.
Publication 1141, General Rules and Specifications for Substitute Forms W-2 and W-3.
Publication 1167, General Rules and Specifications for Substitute Forms and Schedules.
Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns.
Comment on Form 3921.
Use the Comment on Tax Forms and Publications web form to provide feedback on the content of this product. Although we cannot respond individually to each comment, we do appreciate your feedback and will consider all comments submitted.
CAUTION: We cannot respond to tax-related questions submitted using this page. Instead, please see our Tax Law Questions page.