No, you do not want to alter the W-2. Instead, you can adjust the cost basis reported on the 1099-B to avoid double-taxation. Same outcome, fewer red flags. The best way to do this is to rely on information from Form 3921 that your employer should have given you regarding the exercise of the ISOs:
- In the Federal > Income & Expenses > Investment Income section of your return, click Start/Revisit next to Stocks, Cryptocurrency, Mutual Funds, Bonds, Other (1099-B)
- Answer Yes and then select stocks. Import or enter your transactions manually.
- For the ISO transactions, make sure to select Yes to Do these sales include any employee stock?
- Enter the transactions as they appear on the 1099-B with ISO selected as the type of investment.
- If the basis reported on the 1099-B is not correct, you will be able to adjust it to match the supplemental information provided.
- Enter the information on Tell us about your ISO sale
- After entering, you can either enter the adjusted cost basis if you can find it in the supplemental information. Otherwise, select I can't find it and need help.
- TurboTax will ask Did you receive Form 3921 for this sale?
- Enter the information from Form 3921
You can read more about the taxation of ISOs, including unsold stocks here.
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