I sold Qualified Small Business Stock (QSBS) which is 100% exempt from taxes as per the Section 1202 exclusion. There was no 1099-B for this sale. Where do I report this?

[DianeW777]

No, there is no deduction.  The employer is required to include the value in your income.  The value of the stock, which is equal to the compensation that would have been paid instead for the services performed, is taxable compensation to employee. It is subject to income tax withholding, Social Security and Medicare (FICA) taxes, and FUTA (federal unemployment) tax. The withholding must be paid in cash, which usually is taken from other cash wages (it can be paid separately by the employee or by the company as additional compensation subject to additional payroll taxes). Income tax withholding for the stock (an in-kind payment) can be done in two ways:

• Add the value of the stock to regular salary or wages and figure withholding in the usual way on the total amount.
• Withhold a flat 25% of the value of the stock. If the value exceeds $1 million, the withholding percentage is 39.6%.

Qualified Small Business Stock Advantage:

Stock acquired after September 27, 2010: If it’s held for more than five years, there is no tax on the gain. It is free from income tax, alternative minimum tax, and the 3.8% net investment income tax.

@home_owner

[home_owner]

Thank you for clarifying! So as an employee it does not matter if stock was QSBS?  For employee it is taxable and should be regular earnings?

[DianeW777]

Yes.  The amount added to wages is considered compensation for services at the fair market value (FMV) of the stock.  The idea is that the stock will continue to increase in value and thereby giving you a greater return in the future.

@home_owner

[hextall14]

Did you get a reply on this?

[home_owner]

Basically employees cannot take advantage of QSBS. Outside investors can. If you exercised employee options than it is reported as earnings and is taxable. At least this is what I have learnt by checking with Turbotax experts and outside CPA. In my case ,  it was reported in earnings on my W-2 and there is no way to take a deduction or credit against it.  Let me know if you know anything else.

[TomYoung]

@home_owner 

"Basically employees cannot take advantage of QSBS."

That is not literally true.  Any "employer stock" program, QSB or not, has a "compensation" element built-in.  Basically and without going into detail, stock acquired from an employer for the employee's services is (or has the potential to be) considered compensation.  You, as the employee of a QSB, can take advantage of the benefit of QSBS exactly like any outside investor.

[hextall14]

How would this be reflected on your taxes? Seems TurboTax can handle the deduction if it originates from 1099B. However if the gain/compensation is listed as income on W2, where would the adjustment to income tax place in relation to the QSBS deduction?

[home_owner]

If this is W-2 earning than there is no deduction for you. Basically QSBS cannot be used on employee stock options. It is meant for investors.

[hextall14]

Curious on your take?

[tudor77]

I'm not a CPA or tax attorney and this isn't financial advice.

My understanding is that the stock is acquired at the time when the stock options are exercised. The difference between the FMV at the time of exercise and the option strike price is considered income and shows up on the W-2.

IF you choose to exercise and hold AND the company is still a QSB at the time when you acquire the shares (the time of exercise) AND you hold the shares for 5 more years, then you can benefit from the QSBS exclusion on any gain from any further increase in the share price.