Brokerage Tax Witholding

[BooBoo]

I have some grants from mega-corp which I exercise each year prior to expiration. When I “cash out”, the broker requires me to pay 25% in taxes to the IRS. I receive a 1099-B from broker which does not include taxes, only cost, proceeds, and gain. I enter this on 1040 as long term capital gain. The withheld taxes are not shown or entered anywhere. What am I doing wrong?



Thanks,


Boo

 

[Newventurer]

Just to clarify - is the amount you receive net of the taxes?

 

[gerntz]

If they don't put the taxes withheld on line 4 as provided on the form, they've sent you a faulty form. I mean, how do you know they took the taxes out?

 

[kaneohe]

That 25% rate sounds like a "bonus" tax rate. Are you sure you are not doing a same-day cashless exercise of non-qualified stock options where you exercise options and then sell the stock immediately. Your "gain" from exercising option would appear on your W2 (and pay stubs) along w/ the withholding. Your gain on the stock would typically be very small since you only had it one day and would be ST gains/losses, not LT.

 

[cathy63]

Are you still employed by the megacorp? If so, the taxes are showing up on your W-2.

At least some of the proceeds are ordinary income subject to SS, Medicare, etc, so the transaction info and withheld tax money goes back to your corp payroll dept and they remit it to the IRS in the correct buckets and document it on your W-2.

If you are not employed by the megacorp any longer, then you need to do this accounting yourself (ordinary income goes on line 7, even if you don't have a W-2), but you also need to ask the broker what happened to the withheld funds.

 

[RockyMtn]

That 25% rate sounds like a "bonus" tax rate. Are you sure you are not doing a cashless exercise of non-qualifed stock options where you exercise options and then sell the stock immediately. Your "gain" from exercising option would appear on your W2 (and pay stubs) along w/ the withholding. Your gain on the stock would typically be very small since you only had it one day and would be ST gains/losses, not LT.

That's how mine always worked!

 

[kaneohe]

...........................................

If you are not employed by the megacorp any longer, then you need to do this accounting yourself (ordinary income goes on line 7, even if you don't have a W-2), but you also need to ask the broker what happened to the withheld funds.

Going by aged failing memory but I believe megacorp will still issue a W-2 if you are not employee any longer.

I know for sure that retired DW still gets a W-2 from former employer when she uses eligible benefits and gets charged for the taxes on the imputed income.

 

[cathy63]

Going by aged failing memory but I believe megacorp will still issue a W-2 if you are not employee any longer.

I know for sure that retired DW still gets a W-2 from former employer when she uses eligible benefits and gets charged for the taxes on the imputed income.

Interesting! We have some taxable ordinary income from the sale of ESPP shares we've held long term, and the corp should know about it since they require us to use a captive broker. They don't withhold taxes and don't issue a W-2 though.

 

[BooBoo]

That is it, they did issue a W-2. I have 3 options when exercising these grants,
1) Cashless sale
2) Cashless hold
3) Cash purchase

Are they all treated the same from a tax perspective.

Thanks for the feedback.

 

[cathy63]

That is it, they did issue a W-2. I have 3 options when exercising these grants,
1) Cashless sale
2) Cashless hold
3) Cash purchase

Are they all treated the same from a tax perspective.

Thanks for the feedback.

The current year tax liability for all three scenarios should be roughly the same. There will be some variance due to the small short term gains or losses that you'll have in the cases where you sell some of the shares to cover the taxes (case 2) or all of them to realize the income (case 1). This is because the exercise and sale don't happen simultaneously. You end up holding the stock for a short period before the full sale is completed and it goes up or down a little bit during that time you're holding it.

Options 2 and 3 have a possibility for additional taxes in future years when you sell the shares you held. At that point you owe cap gains taxes on any gains you made since the exercise date.

 

[kaneohe]

That is it, they did issue a W-2. I have 3 options when exercising these grants,
1) Cashless sale
2) Cashless hold
3) Cash purchase

Are they all treated the same from a tax perspective.

Thanks for the feedback.

You never told us which option you picked.

Homework: Exercising Nonqualified Stock Options
a link of the first link leads to

Withholding on Stock Compensation

 

[BooBoo]

Confused

Thanks for your responses. I picked the cashless sale. After reviewing my W2, I also entered a 1099-B for the same transaction because I received one from the broker. Is this correct ? Do I need to file the 1099-B ?

 

[cathy63]

Thanks for your responses. I picked the cashless sale. After reviewing my W2, I also entered a 1099-B for the same transaction because I received one from the broker. Is this correct ? Do I need to file the 1099-B ?

You have some of the income from this sale on your W-2 and some on the 1099-B (although that could actually be a loss instead of a gain). If you are using tax software, you need to enter the 1099-B and the software will create a Schedule D that you will file with your return. You don't send the 1099-B to the IRS directly.

 

[BooBoo]

Less confused

I think I have figured this out, the problem is that the 1099-B does not include the taxes withheld. Not sure how they are allowed to get away with this.

Thanks again.

 

[kaneohe]

I think I have figured this out, the problem is that the 1099-B does not include the taxes withheld. Not sure how they are allowed to get away with this.

Thanks again.

Did you study your W2 or your pay stubs.......when you exercised the option you should have seen an increase in your income and a corresponding withholding on your pay stub. The broker is merely selling the stock and providing documentation on the small gain/loss for the day you held it.
Your company is providing the documentation of the bargain element income and the withholding.

If both did it....documented the withholding......you'd be getting a double credit for withholding which would be incorrect.

 

[cathy63]

What kaneohe said. The brokerage did not withhold any taxes so they should show $0 in box 4 of your 1099-B. The broker's job is to complete the transaction, then send the money for the taxes to your employer and the rest to you. Your employer is the one who sends the taxes over to the IRS, so they are the ones who report it on your W-2 as withholding.

There may be a note somewhere on your W-2 that says something like "NQSO disposition", or you may have gotten an extra pay stub when you did the transaction, or it may just be hidden in the total numbers. If your stubs are in an online system, go back to the timeframe of the transaction and look to see if there's an extra one there or if the one for the exercise is larger than usual and has any notes on it. If you still don't understand it, you can speak to someone in your company's payroll department and ask them for help; but in any case the documents you have sound like they're correct and you should go ahead and use that info to prepare and file your tax return.

 

[FI_RElater]

Bingo!

Are you still employed by the megacorp? If so, the taxes are showing up on your W-2.

At least some of the proceeds are ordinary income subject to SS, Medicare, etc, so the transaction info and withheld tax money goes back to your corp payroll dept and they remit it to the IRS in the correct buckets and document it on your W-2.

If you are not employed by the megacorp any longer, then you need to do this accounting yourself (ordinary income goes on line 7, even if you don't have a W-2), but you also need to ask the broker what happened to the withheld funds.

{that’s what happens with stock grants... you also need to look if, when you exercise the grant, if you are beyond the SS income phaseout— make sure if you are that HR doesn’t take any more SS out. }