How do I report short term capital gains from exercise and sale of ISO options for Massachusetts?

[jc8871]

I have exercised and sold ISO in 2018, the gains I got from that transaction were reported in my W2 as well. For federal reporting I went in and fixed it by adjusting the cost basis to what my broker reported in an adjustment form to prevent my gains being taxed twice. This results in my short term capital gains being taxed as normal income in federal. But for MA, the short term capital gains tax is higher than normal income tax, and when I try to import my stock sales from federal portion of my return the capital gains come out to be -11 (the fees i paid for the transaction) thus I am not able to pay the correct rate for MA Short term capital gain. Do I have to report anything under "Any Short-Term Capital Loss Differences?" when doing state taxes?

[TomYoung · Accepted solution]

"This results in my short term capital gains being taxed as normal income in federal."

A somewhat pendantic correction here, but maybe relevant; you had no short term capital gain.  The sale created compensation that gets taxed at ordinary tax rates, and the compensation gets added to your basis for reporting the sale.  Accordingly, a "same day" sale - which I'm guessing this is - typically shows a small loss due to selling commissions and fees.  So I'd think that the ($11) that's coming over from the federal income tax return is exactly what's been reported on Form 8949.

If it's really the tax "rate" on STCG's that different than the ordinary rate, I'd think that TurboTax would simply move the transaction over to the state form "as is" and the program would then apply the different rate.  That looks to be what it's doing here.

I know nothing about Massachusetts tax law, But my impression is that most states simply conform to federal law in this area.  If Massachusetts doesn't tax the "spread" at the time of the sale as compensation but instead treats it as capital gain, then I'd think you would need to adjust that ($11) figure for Massachusetts.  That would be offset - dollar wise if not tax wise - by a reduction in reported Massachusetts compensation.  Has that happened?

Tom Young

[jc8871]

Thanks a lot! I think I understand now after reading up, I think you are right that the spread is taxed at ordinary income and, if you keep holding the stock for longer then it's considered as Capital Gains