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BillP23
Level 1

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

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!

 

1 Best answer

Accepted Solutions
hbl3973
Level 8

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

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.

View solution in original post

8 Replies
hbl3973
Level 8

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

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
Level 1

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

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
Level 1

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

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
Level 8

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

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.

View solution in original post

BillP23
Level 1

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

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
Level 1

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

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

hbl3973
Level 8

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

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
Level 1

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

The fee is below the 2% threshold anyway.

 

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

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