The losses on the stock and options will offset some or all of the taxable grant income, so you might not have to pay any tax, but you still have to file the tax return. You might even end up with a capital loss carryover that can be used to reduce your taxable income next year.
"If so how?"
I'm not sure what you are asking. The university will send you a Form 1098-T, and you will have the consolidated 1099 statement from the broker. You enter the information from those forms into TurboTax, and TurboTax will guide you through the filing process. You have to file a California state tax return in addition to the federal tax return.
If you use TurboTax Online you have to use Premier (or higher) to handle the investment transactions. If you use the CD/Download TurboTax software you should also use Premier (or higher) to make sure the investment transactions are handled properly.
