Items you will need
- W-2 Form
- 1099-B Form
- 1040 Form
- IRS Schedule D
Companies often award employees non-qualified stock options as a form of long-term compensation. These stock options afford employees the chance to purchase stock at a predetermined price (strike price), despite the potential of the price going up over time. If an employee decides to exercise his option, profit amounts to the difference between the market price and the strike price. For tax reporting purposes, however, the IRS treats such profit as compensation and thus taxes it as such. You must report this income whether or not you sell the stock.
Report your non-qualified stock options when you exercise your option. Your employer will require you to pay federal, state and Social Security taxes when you exercise your option. On your W-2 form, in box 12 with the code “v,” your employer will list the total compensation when you exercised your option. If your employer does not include this amount in box 1, you must declare the amount on your 1040 form, on line 7. This is all you need to do, if you exercise your option but do not sell the stock.
Fill out the Schedule D form, Part 1 if you choose to sell your stock before the end of the year. You will report your capital gain or capital loss according to the difference between the market price when you buy the stock and the market price when you sell the stock. Record any broker fees or commissions you incur when selling the stock as a loss.
Attach your 1099B, provided by your broker, to your income tax return with a paperclip. Do not staple it to your return. The 1099B documents the sale of the stock, and details any broker fees and commissions incurred during the sale.
You should always contact a financial adviser before making decisions regarding your long-term investment strategy.
You should always weigh the consequences of taxes before you choose to exercise your options, sell your stock and spend the cash. Do not always count on your employer to withhold the correct amount of taxes when you exercise your option. Always double-check before selling and spending your cash, or you might find yourself owing at tax time.
- tax forms image by Chad McDermott from Fotolia.com