ISO same year exercise and sale not showing expected short-term capital gain

[BillP23]

I exercised ISOs this year and then sold the shares as part of the company being acquired (privately). The sale price was greater than my strike price; however, when I enter the exercise and sale in TurboTax (Home & Business), it says there was no gain or loss.

To simplify, let's assume I was granted a single  ISO on 8/1/2014 (strike price: $10k), exercised on 11/1/2020, and sold (company acquired) on 12/1/2020 for $50k. Because the company was acquired the same year, the 3921 correctly lists the exercise price as $10k and the FMV on exercise date as $50k. I would expect to incur $40k short-term capital gains for the sale.

What I'm doing:

• Stocks, Mutual Funds, Bonds, Other: Click Update
• Click Add More Sales
• Yes, I have a 1099-B and I'll type it in myself
  • Box 1c (date sold): 12/1/2020
  • Box 1b (date acquired): 11/1/2020
  • Box 1d (sale proceeds): 50,000
  • Box 1e (cost basis): 10,000
  • Box B: Short-term, noncovered (since the strike price is not reported on my 1099-B)
• None of the less common items on the 1099-B apply
• This is employee stock -> ISO, and I sold shares exercised in 2020
• Sale information
  • Date sold (box 1c): 12/1/2020
  • Number of shares sold: 1
• Total proceeds is $50k - Looks right to me!
• Form 3921
  • Date option granted (box 1): 8/1/2014
  • Date option exercised (box 2): 11/1/2020
  • Exercise price per share (box 3): 10,000
  • FMV - exercise date (box 4): 50,000
  • Number of shares transferred (box 5): 1

The next screen says I have zero gain from the sale.

It says the net sales price was $50k, with $10k being price paid and $40k being compensation income. This all makes sense to me.

It also says that the cost basis was $50k. But that's not right, is it? I get that the FMV was $50k when I exercised, but I only paid $10k. Why aren't I getting taxed on this difference?

Thank you for your help!

[hbl3973]

BillP23,

As you had reported, the $40K gain was treated as compensation income, taxed at ordinary tax rates.  Since you had now paid tax on the $40K gain, your new basis becomes $10K+$40K=$50K.  Thus the sale was breakeven.

[BillP23]

Thank you so much for replying, @hbl3973. I really appreciate it.

What I hear you saying is: the sale itself should be breakeven, since the cost basis was $50k, but I should be taxed $40k for exercising the shares (since the strike price was $10k and the FMV was $50k). Is that correct?

My concern is that I do not appear to have $40k tax liability showing up anywhere in my forms.I  realize it is mentioned in the middle of the Easy Step process as "compensation income", but if I delete the investment account from Turbo Tax (on the screen: "Here's all the investment accounts we have so far", where it lists the gain/(loss) as 0.00), there's no change in my overall federal tax liability (i.e., in the upper left "Federal Refund" box).

This is the heart of my concern. Shouldn't I have some net tax liability from this whole transaction that shows up in what I owe? I can't believe that I exercised my options for $10k, sold the shares the same year for $50k, and have no tax liability showing up in Turbo Tax after following the steps I outlined. I thought I would owe taxes on the $40k, but the liability does not appear to be showing up anywhere. Am I missing something? 

[BillP23]

Another way to put it: when I enter all that, my overall taxes don't change. They should, right? I should have taxes on the $40k short-term gain? It's not showing up in what I owe in taxes.

[hbl3973 · Accepted solution]

BillP23,

The $40K of income would have already been included in your W-2 Box 1 taxable income.  Hence putting in the sales transaction shouldn't change the tax calculation unless brokerage fees made the sale a small capital loss.

[BillP23]

That makes total sense. Thank you so much for your help!

I then have a follow-up question: I exercised my shares by taking out a loan (since I did not know about the acquisition at the time). The bank waived the interest but they did charge a flat fee I'd like to write off. Since the income from the exercise is already included in the W2, how do I go about writing off the loan fee?

[BillP23]

And @hbl3973, please let me know if this would be better for me to open this as a separate question.

[hbl3973]

BillP23,

Unfortunately, the law changed in 2017 and such fees are no longer federally deductible.  However, you can still enter them in TurboTax as miscellaneous deductions subject to a 2% AGI threshold in case your state income tax does allow them to be deducted.  The 2% threshold means that 2% of your adjusted gross income is subtracted from the sum of such miscellaneous expenses as listed in, say, Investment Expense Tax Deduction - Which Fees Can You Deduct? (moneycrashers.com) , and only what's left, if any, is an itemized deduction.

[BillP23]

The fee is below the 2% threshold anyway.

Thank you for all your help. You are a font of information!

[laplantes]

I am have the exact same problem but my stock sale is NOT reported on my W2 anywhere I can find and I unchecked the box "reported on W2" since it's not and I still somehow have a $0 gain/loss when I should have something to pay taxes on.

[DianeW777]

 It could be in your Box 1 wages with no other notation on your W-2 or paystub. It is required of the employer to include in your W-2 the difference between option price and fair market value on the date of exercise.  It's important to check with your employer first if you are unsure.

The cost basis is the amount you paid (discounted price) and the amount included in your income (difference between option price and FMV on the date of the exercise).

Please use the steps below based on the TurboTax product you are using to begin or review your entry.

• Entry steps in TurboTax Online:
  • Tax Home > Wages & Income > Less Common Investments & Savings > ISO Exercise & Hold: Edit/Add
• Entry steps in TurboTax Download:
  • Search (upper right) > ISO > Select ISO exercise & hold

Information needed to complete the return:  

• Is this a statutory or non-statutory exercise? (Employer can provide)
  • If the employee is no long employed at the company at the time of exercise it is non-statutory.
• Form 3921 provided by the employer or a substitute document with the necessary information. See the Boxes numbers below.
  1. Date option granted
  2. Date option exercised
  3. Exercise price per share
  4. FMV per share on exercise date
  5. Number of shares transferred

@laplantes  

[laplantes]

I'm sure it's not in my W2. I exercised my options because I left my prior employer. I was only with my prior employer for a few months of 2023. I went into ADP and added the gross payment amounts from each of my paychecks for 2023 and they add up exactly to the amount on my W2.

So I'm certain that my W2 does not have my stock option excersise included since it was an amount that would have been very obvious. It's also not noted anywhere in box 14.

I did manage to fix it though. In turbo tax, instead of saying "I had 1-3 sales" and then stepping through it that way, I said I would enter them all as one sum (since it was only one sale anyway). And then it got it right and said I owe something.

[DianeW777]

To be clear, make sure to use your option price you paid for the stock so that only the difference  is taxable income to you.  The selling price minus what you paid for the stock.  Do not use the fair market value of the stock when you exercised the option.

Please update here if you have any further questions.

@laplantes  

[laplantes]

Right! Thanks.

For clarity I will explain (with fake numbers) exactly what I did.

I was given 100 shares at $10 per share when I started. After a year I was given the option to buy them or take them as options. I took them as options.

When I left the company less than 1 years after I got them as options, I purchased the 100 shares for $1000.00 and then, upon leaving, sold them.

At the time of I left they were worth $100 per share instead of $10 when I started.

So I paid $1000 and I got a check for $10,000.

So on for 1099-B I have a cost basis of $1000.00 and a total of $10,000 which works out to $9000 of short term capital gains that I was taxed on (about 22-24% or something)

[DianeW777]

Yes, that's exactly what you should use in your tax return.  The result of gain is correct and would be included as income for 2023 ($9,000 in your example).