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Old 09-10-2019, 03:36 PM   #21
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BTW, this situation was probably the most common frightening question we'd see on our internal "finance and money" board at Megacorp. It is a common problem to forget the Sched D stuff since it is on the W-2.

And it usually popped up around this time of the year. The IRS starts getting those printers and computers humming on automated audits, now that they've ingested the spring and extended tax forms.
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Old 09-10-2019, 03:36 PM   #22
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@kaneohe Thanks.
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Old 09-10-2019, 03:38 PM   #23
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Filing schedule D will put me in a position that I pay the Tax twice. Lets say the difference of grant and actual cost at the time of exercise was $50K, it was added to our W2 and our Tax increased (depend on total income) about $14K. Then I input it in schedule D as well and the Tax again adds another $12K. Do you think IRS takes more than 50%? Well there is also California Tax on it. Do you think this is correct filing?
No, I don't.

As others have said, you're not entering the correct basis.

Make sure that the number you enter in column (e) on Schedule D is equal to your actual basis. I'm not exactly sure how to calculate it for ISOs, but it should be almost exactly equal to the amount in column (d) on Schedule D. Thus the gain or loss will be very close to zero, and your incremental tax should be very close to zero, not the $12K that you've mentioned.
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Old 09-10-2019, 03:41 PM   #24
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I'm not exactly sure how to calculate it for ISOs, but it should be almost exactly equal to the amount in column (d) on Schedule D. Thus the gain or loss will be very close to zero, and your incremental tax should be very close to zero, not the $12K that you've mentioned.
The basis is the amount reported on the W-2.
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Old 09-10-2019, 03:42 PM   #25
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When reporting stock option sales, I always reported 2 types of income: W-2 income and capital gain (or loss) income on schedule D. The capital gain or loss, in case of a same day sale was usually small. That capital gain or loss was reported to the IRS by the brokerage company but the basis reported was always wrong and had to be adjusted.
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Old 09-10-2019, 03:55 PM   #26
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The basis is the amount reported on the W-2.
Thanks. I wasn't sure if the W-2 reported the basis or just the taxable amount.

For example, if I was granted 1000 shares at $10 and exercised at $30, I wasn't sure if the W-2 reported amount was $20K or $30K.

(All my SO's were NQSO's and I know ISO's are taxed somewhat differently, so I'm trying to be helpful without stating things that may not be accurate.)

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Old 09-10-2019, 03:55 PM   #27
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Well, I decided to visit professional Tax preparer.
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Old 09-10-2019, 03:56 PM   #28
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Thanks. I wasn't sure if the W-2 reported the basis or just the taxable amount.

For example, if I was granted 1000 shares at $10 and exercised at $30, I wasn't sure if the W-2 reported amount was $20K or $30K.

(All my SO's were NQSO's and I know ISO's are taxed somewhat differently, so I'm trying to be helpful without stating things that may not be accurate.)

They report $20K
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Old 09-10-2019, 04:02 PM   #29
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Thanks. I wasn't sure if the W-2 reported the basis or just the taxable amount.

For example, if I was granted 1000 shares at $10 and exercised at $30, I wasn't sure if the W-2 reported amount was $20K or $30K.

(All my SO's were NQSO's and I know ISO's are taxed somewhat differently, so I'm trying to be helpful without stating things that may not be accurate.)

I think your hunch is correct.........W2 reports bargain element so 20K but basis is 30K. Only NQSO experience here too but not letting that stop free advice worth what you paid for it tho it does sound from a previous link that a disqualifying ISO transaction is similar to NQSO.
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Old 09-10-2019, 04:03 PM   #30
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US taxes income twice all the time. Company profits are taxed and them dividends from said company profits are taxed.
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Old 09-10-2019, 04:07 PM   #31
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Filing schedule D will put me in a position that I pay the Tax twice. Lets say the difference of grant and actual cost at the time of exercise was $50K, it was added to our W2 and our Tax increased (depend on total income) about $14K. Then I input it in schedule D as well and the Tax again adds another $12K. Do you think IRS takes more than 50%? Well there is also California Tax on it. Do you think this is correct filing?
NO! It will NOT! You're doing it all wrong/misinterpreting it.

Let's say that the stock FMV is $65k and you paid $15k.... the W-2 is the $50k excess of FMV over what you paid... as it should be.

The sale of stock is proceeds of $65k but your basis is $65k (the $15k you paid plus the $50k included on the W-2) and your gain is $0.

So at the end of the day you have W-2 income of $50k and a gain of $0.

As others have noted, if the sale is at a different price than the purchase or you have transaction costs you might have a small gain or loss rather than $0.
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Old 09-10-2019, 04:33 PM   #32
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Yup, you have to report sales on schedule D. Even if it's zero gain.
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Old 09-11-2019, 07:33 AM   #33
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Yup, you have to report sales on schedule D. Even if it's zero gain.

Yep. I was burned by this many years ago. I learned the hard way you need to file a schedule D so the IRS has the correct cost basis. In my case, it wasn’t easy to get resolved, but it eventually worked out.
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Old 09-12-2019, 03:20 PM   #34
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Resolution: I hired H&R Block professional Tax preparer to review the problem. After reviewing the CP2000 Form and my 2017 Tax Return, she said that everything was filed as it should, ISO proceeds was included in W2 and should not be reported separately on any other form. She offered to call IRS as she could miss something about latest changes in filing ISO and called IRS. I authorized her to talk on my behalf. After reviewing the case IRS representative said that I owe $0 and he is going to correct the case.
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Old 09-12-2019, 04:04 PM   #35
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Yes, it happened to me, too. In 2005, I did a cashless exercise of incentive stock options. There was about $85,000 in underlying stock, and the taxable "gain" which I received was a little over $9,000. I ended up getting a little over $6K when taxes were taken out.

In 2007 I got a letter from the IRS saying I owed $31,000 in 2005 taxes based on an unreported sale of about $85,000 in stock. (They assumed the cost basis was $0 in calculating that.) It turns out what happened is that I forgot to enter this transaction on Schedule D. (Because the income from it was already taxed, the cost basis equalled the sale price and was a net zero on my taxes.) I knew I should have entered it, but it was a zero on Schedule D, so I forgot to get back to it.

A little freaked out, I called the IRS and explained what happened, and that I had a $9K amount listed in Box 14 as code 'V' on my W-2 corresponding to gains already taxed -- thus the taxable amount was already included in my W-2 earnings -- and the IRS quickly closed the case with no liability on my part. As quickly as it was resolved, and seeing stories above, I suspect this IRS sees this fairly often.
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Old 09-12-2019, 05:01 PM   #36
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I advise that next time, save yourself the headache and record the transaction on Schedule D, with basis = sale price less any SEC fees and selling costs. I make occasional mistakes with advice here, but there are a bunch of smart people saying the same thing so I'm confident this isn't one of them. The IRS allowed it because it's essentially a pointless exercise to have you do the revised return, but if you leave it off schedule D I suspect they'll hit you on it every time, because they don't know it's an ISO exercise. But if you like letters from the IRS telling you that you owe them more money, do the same thing next time.
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Old 09-12-2019, 09:19 PM   #37
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I advise that next time, save yourself the headache and record the transaction on Schedule D, with basis = sale price less any SEC fees and selling costs.
For the sake of others who might read this thread, the IRS is quite specific on what the basis should be. While the above is approximately correct, I don't think it is 100% accurate.

The basis is what you paid for the stock (plus, not minus, any selling costs which include SEC fees). While someone selling a stock at the same time as they bought it - which is what most stock options exercises probably are - probably paid about what they sold it for, the two numbers can differ slightly and to be proper, should be accounted for independently.

The calculations usually can be done with the paperwork given to the individual by the brokerage firm handling the options exercise, although it isn't always obvious.
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Old 09-13-2019, 05:55 AM   #38
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I advise that next time, save yourself the headache and record the transaction on Schedule D, with basis = sale price less any SEC fees and selling costs. I make occasional mistakes with advice here, but there are a bunch of smart people saying the same thing so I'm confident this isn't one of them. The IRS allowed it because it's essentially a pointless exercise to have you do the revised return, but if you leave it off schedule D I suspect they'll hit you on it every time, because they don't know it's an ISO exercise. But if you like letters from the IRS telling you that you owe them more money, do the same thing next time.
A lot of people at Megacorp reported the same. I.e., they make the mistake, get the letter, call the IRS, and the IRS says: "No worries!" Then it happens again next year...

So, yeah. This mistake can be fixed with a call if you get the right people. But do you really want to talk to the IRS every year?
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Old 09-13-2019, 06:08 AM   #39
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For the sake of others who might read this thread, the IRS is quite specific on what the basis should be. While the above is approximately correct, I don't think it is 100% accurate.

The basis is what you paid for the stock (plus, not minus, any selling costs which include SEC fees). While someone selling a stock at the same time as they bought it - which is what most stock options exercises probably are - probably paid about what they sold it for, the two numbers can differ slightly and to be proper, should be accounted for independently.

The calculations usually can be done with the paperwork given to the individual by the brokerage firm handling the options exercise, although it isn't always obvious.
Yes, that's a correct clarification. Thank you.
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Old 09-13-2019, 08:09 AM   #40
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For the sake of others who might read this thread, the IRS is quite specific on what the basis should be. While the above is approximately correct, I don't think it is 100% accurate.

The basis is what you paid for the stock (plus, not minus, any selling costs which include SEC fees). ..........................................
just to make life more interesting................some companies report gross proceeds of sale while others report net proceeds of sale. IRS forms don't specify..........they just list proceeds of sale on the form and then on the instructions they have a zillion words to explain what to do.

If the company reports net proceeds, the selling costs have already been taken into account so you don't do anything with them. If the company reports gross proceeds then you would do as you say and include selling costs in the basis.
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