If you haven't sold yet then there is nothing to report for Tax year 2022.
An employee who exercises an ISO must report the bargain element of the transaction as earned income that is subject to withholding tax. ISO holders will report nothing at this point; no tax reporting of any kind is made until the stock is sold.
Taxation of ISOs
ISOs are eligible to receive more favorable tax treatment than any other type of employee stock purchase plan. This treatment is what sets these options apart from most other forms of share-based compensation. However, the employee must meet certain obligations in order to receive the tax benefit. There are two types of dispositions for ISOs:
- Qualifying Disposition: A sale of ISO stock made at least two years after the grant date and one year after the options were exercised. Both conditions must be met in order for the sale of stock to be classified in this manner.
- Disqualifying Disposition: A sale of ISO stock that does not meet the prescribed holding period requirements.
It is good to know now that employers are not required to withhold any tax from ISO exercises, so those who intend to make a disqualifying disposition should take care to set aside funds to pay for federal, state, and local taxes, as well as Social Security, Medicare, and FUTA.
