I am trying to report taxes on sales of ISOs from my employer and confused about how Turbotax is handling compensation income from these sales. I am immediately exercising and selling my ISOs in the same calendar year, and my understanding is that no taxes are withheld on these sales.
Here’s an example to illustrate why I’m confused:
When I import one of my sales from my 1099-B, the gross proceeds are $3,499.82. The cost basis is $9.00, which is inline with the option exercise price ($0.09), so the realized gain is $3,490.82 which I would be taxed on at ordinary income tax rates.
As suggested by other posts in the community, I chose to follow the “Guide me step-by-step” for this sale in Turbotax and I enter the additional Form 3921 details from my employer. After following the interview in Turbotax, I’m told that my cost basis for this sale should be adjusted to $3,492.00 and the spread between the exercise and sale price ($3,483.00) counts as compensation income, not capital gains (see attached)
The problem is that I’m fairly certain none of this compensation income is included in Box 1 of my W-2. The ISO sales are stated in Box 14 of my W-2, but I’m fairly certain none of the amount is included in Box 1.
Since this compensation income is not included in my W-2, and Turbotax is adjusting the cost basis of these ISO sales such that the short-term gain is very little, how do I account for this compensation income in my return so I don’t underpay my taxes?
