topic Startup ISO Deferred Gains in Get your taxes done using TurboTax

Startup ISO Deferred Gains

ViperXpyro — Fri, 11 Feb 2022 21:22:48 GMT

I was part of a startup which sold in 2021. During 2021, I did not work for the startup, but they sent me a W2 for the sale. It appears to be for the sale, however the amount on the W-2 does not match the proceeds I received in 2021. I have read that this number is sometimes offset relative to FMV at time of exercise, etc, but the math still doesn't add up.

Additionally there are escrow holdings causing deferred payments to me in both 2022 and 2023, so I don't even have the final value/gains.

How should I handle the deferred gains, especially when entering cost basis?

NOTE: The deferred gain isn't a set amount (it's tentative) so I can't simply add it to my existing gains.

Re: Startup ISO Deferred Gains

GeorgeM777 — Tue, 15 Feb 2022 16:36:07 GMT

It is not all that clear why you received a W-2 or what the amounts on the W-2 represent. But because your question references an ISO deferred gain, we will provide some general background information regarding ISOs and an 83b election.

An Incentive Stock Option is a benefit given to employees and allows them to purchase stock in the company at a discounted price. This option requires employees to pay taxes on the stock at the time of purchase. A tax may be applied at the time of sale, but that is dependent on how long the stock was held. Employees have to wait until their stock has vested before they can exercise the option.

An ISO gives employees the ability to file something called an 83b election. An 83b election is a provision under the Internal Revenue Code. If your company gave you an ISO, and it appears they did, you had 30 days to complete form 83b and file it with the IRS. Had you made the 83b election, of if your start-up made it on your behalf, you would have had the option to pay taxes on the pre-vested, pre-exercised options, at their current price. Assuming the value of your ISOs increased, this would have lessened your tax burden when the ISOs vested or you exercised the option represented by the ISO.

Your question is more complicated given that the start-up is no longer in business (you indicated it had been sold) and you need to account for your ISOs. You also mentioned that you have deferred gains but generally with an ISO that has been exercised, any gain in the underlying stock is not taxed until sold. However, the plan governing your ISOs and subsequent exercise may have provisions that impact the way in which you report all of this for tax purposes. Thus, you can follow-up with additional information, but this may involve tax advice beyond what we can provide.

Re: Startup ISO Deferred Gains

ViperXpyro — Tue, 15 Feb 2022 21:17:53 GMT

I wish I had known about an 83b. Sadly I didn't. Regarding another issue with this sale, my taxes are problematic. At this point, I plan to employ a CPA rather than do my own taxes. The W-2 is because the ISO triggered as disqualified despite me holding the stocks for the full qualifying timeline. Pursuing the company to correct the W-2 has proven fruitless.

The sale triggered in 2021 and I was issued a payment.

Then I received an email and a second, much smaller payment in 2021.

The sale is now being brokered/handled by Fortis, who has listed 2 more pending payments (one for 2022 and one for 2023). Both held in escrow pending certain things like legal fees.

I mainly am pursuing a CPA at this point because i'm not sure how to handle my cost basis for 4 separate payments, 2 of which aren't even in this tax year.

If it were 1 payment, I know for a disqualified ISO sale, my cost basis becomes my W-2 box 1 amount (the W-2 only has the stock sale, nothing else). But I am not sure for the other payments. Or maybe box 1 is my total cost basis for 2021?