Exercised NQSOs. 1099 cost basis doesn't reflect compensation element. Do i manually enter ONLY W2 box 12- V or do I ADD that amount to cost shown on 1099 too? @TomYoung?

[GabiU]

@TomYoung 🙂

[TomYoung · Accepted solution]

The broker's 1099-B should be reporting only your " out of pocket" cost to acquire the stock you're selling, i.e. (# of shares sold) x (exercise price per share).  To that you want to add the compensation cost for the shares sold created by the exercise of the NQSO.  

If you happen to be selling ALL the shares received in the grant, (we're talking about the GROSS number of shares stated in the grant, before shares are sold or withheld for taxes or exercise), then you could simply add the Box 12 compensation amount to the 1099-B amount.

In the more likely and more common situation where you are selling less than the GROSS number of shares, you add a the compensation element for only the number of shares sold.

So, for example, if the gross number of shares in the grant was 80 and the associated Box 12 amount was $640, then the"per share" amount would be $8.  And if your sale was for 20 shares you'd add $160 to the 1099-B amount.

[cecelia]

TomYoung, I just knew you would know the answer to this -- thank you! Exactly the information I needed!  I read somewhere that I should combine my out of pocket costs with the compensation element.   But I'll use the compensation element on W2 Box 12 -V only for the shares I sold. I think I can figure that out by looking at the 1099, adding up total sold (& the gains.)

Complicating matters...  my 1099 shows that when I sold stock it was AFTER I exercised.  You see, I did not conduct a cashless exercise. I paid cash up front to exercise and then took the cash back based on what i needed to pay myself back the cash.
   
And there were TWO transactions that I conducted to get my cash back:
one is short term cover securities (exercised 300 options acquired 6/18 and sold stock in 8/18)
one is long term covered securities (about 120 stock options acquired 3/17 acquisition date of stock, sold also on 8/18)

Maybe I should enter these transactions separately in Turbo Tax vs. summarizing?  Then adjust the cost basis for each transaction using the compensation element + out of pocket for each. What do you think?

[TomYoung]

"Complicating matters...  my 1099 shows that when I sold stock it was AFTER I exercised.  You see, I did not conduct a cashless exercise. I paid cash up front to exercise and then took the cash back based on what i needed to pay myself back the cash."

I can't emphasize too, strongly here;  HOW you effected the exercise has no effect on your basis in the stock.

If you pull cash out of your pocket to exercise, do a cashless exercise, or borrow the money to exercise from Uncle John, your per share basis is exactly the same: the sum of the per share strike price + the per share compensation created by the exercise.  Since the per share compensation is based on the per share"fair market value" used by the employer to make the calculation in the first place, your per share basis is the SAME as the per share "fair market value" the employer used.

So the calculation of gain or loss for ANY sale of the stock for whatever reason - for taxes, for exercise or for "cash in my pocket" - uses the same mechanics: proceeds minus basis.  You have a capital gain or loss, period.

[cecelia]

Okay got it! Thanks for the clarity.

I ventured to transactions for Morgan Stanley. The first is short-term covered. second is long-term covered.

For each transaction I provided the information that was on the 1099. But in TurboTax I clicked on "write in additional information". From there I was able to enter an adjusted /corrected cost basis for each. I calculated the cost basis for each using (the number of shares x the gain aka compensation element) + (number of shares x cost out of pocket).  

I think everything's good to go.
I was confident I could do it in the software but I needed the guidance on this final piece because there's a lot of confusing information online. It's generalities like "cost basis is a combination of your w2 box 12v and out-of-pocket expenses" that can be really misleading. The detail you provided was exceptionally helpful. A real treasure to find in my hour of madness.

Thanks again!

[DDollar]

Your adjusted cost basis is the exercise price, which should be the amount on your 1099-B plus the bargain element, which is the amount reported in Box 12 -V.   You have to adjust the cost basis of the stock as shown on your Form 1099. You will have to enter the 1099-B to account for any capital gain or loss as well as adjust the cost basis to reflect the amount reported on your W-2.  To enter your 1099-B, go to:

• Federal Taxes
• Wages & Income
• Investment Income
• Stocks, Mutual Funds, Bonds, Other
• Answer Yes you received a 1099-B
• Do not enter your broker-dealer name and download your 1099-B, instead,
• Click on "I'll type it in myself"
• Enter your Broker and click Continue
• Indicate the type of trades you have on your 1099-B (A, B, D, E, X)
• Enter the details of your transactions as reported on your 1099-B THEN
• Check the Box for "This sale involves an employee stock plan (including ESPP) or an uncommon situation".  Additional information will appear.  Click on Start Now
• Indicate "I have sales from an Employee Stock Plan, including ESPP, NQSO, ISO, RS, and RSU"
• Follow the instructions for the type of employee stock plan you have.  Additional information on these plans is available by clicking the blue Learn More link

[Edited 04-11-2019 | 5:40 EDT]