Form 3921 box 3 Exercise Price Per Share is less than box 4 FMV on Exercise Date, TurboTax, Smart Check doesn't like that, but that's what's recorded in my Form 3921?

[Rebecca32]

I have the same problem for 2021 taxes. I spoke to 3 different tax experts about this and none of them could figure out how to get around the issue of the FMV being less than the exercise price. This does happen, so I don't understand why they can't let this go through. In my case, the reason why I exercised at that price even though my exercise price was more than the value is because I sold them for more. 

[GeorgeM777]

@Rebecca32  On our test return, we were able to enter ISO information where the exercise price for the option, at the time of exercise, was greater than the FMV of the underlying stock.  In other words, when we exercised the option to purchase the stock, we immediately had an unrealized loss.  In full disclosure, we did indicate on the page that requested purchase information, that we did not receive Form 3921.  Upon indicating that we did not receive a Form 3921, we had the option to enter information about our ISO purchase/exercise.

Here are screenshots of two pages from our test return that contain the information about the ISO exercise, purchase, and subsequent sale.

[pr0]

Hello - I am getting confused with the difference between "Exercise Price" and "FMV per share" since the ISO income is already reported on my W2 and not to double count, which one do I use as my adjusted cost basis for reporting in the 1099 section in TT?  Do I use the FMV or Exercise price?  

(I have these numbers from a 3921 form that I received)

[AmyC]

1. The exercise price is the fair market value when you were granted your option to purchase the stock. This is the amount added to your w2 income and is your basis in the stock along with any expenses to buy or sell the stock.

2. Exercise plus expenses to buy and sell.

@pr0

[pr0]

thank you Amy!

From what I see the gain on the ISO and the NQs are reported on my W2 and taxed as regular earnings.  Thus, I should adjust my cost basis in TurboTax to be the same as the selling price in order not to show any gain in the 1099-B section and be double taxed.  Do I understand this correctly?

[AmyC]

Yes. Whatever is listed as additional income in your w2 along with any additional expenses to buy and sell will be your cost basis, 

@pr0

[pr0]

Thanks.  I am actually adjusting the individual transactions and their respective cost basis so I need to take the total from W2 and translate it using the received forms from employer to individual cost basis for each trade.

This created a situation where all of my cost basis for the ISO & NQs are the same as the selling price so effectively 0 profit if looking at 1099-B only.  Does this make sense to you?

[GeorgeM777]

Maybe.  If your cost basis was the same as the selling price, then yes, you will have neither a gain nor loss (this assumes no commission or fees were charged).  However, and to follow-up on the comments from @AmyC, your exercise price is going to be your cost basis if the sale is a qualifying disposition.  A qualifying disposition for ISOs is when you sell 2 years after the grant date and more than 1 year after the exercise date. 

In contrast, a disqualifying disposition is anything other than a qualifying disposition.  With a disqualifying disposition  you pay ordinary tax on compensation income and long term or short term gain on capital gains.

For ISOs, compensation income is the spread when ISOs are sold for a profit.  The ISO cost basis is the cost at exercise for the shares plus any amount included in compensation income from a disqualifying disposition. 

@pr0

[pr0]

Thank you. This is helpful.  

I understand ISO -> Cost basis = selling cost (as income reported on W2)

for NQ - is this different or same?

[GeorgeM777]

Yes, for a NQSO, the cost basis is equal to the exercise price, multiplied by the number of shares exercised. 

@pr0

[TomYoung]

@GeorgeM777   @pr0 

"Yes, for a NQSO, the cost basis is equal to the exercise price, multiplied by the number of shares exercised. "

That is incorrect.  The correct cost basis for stock acquired via a NQSO is the sum of the exercise price paid plus the the compensation created by the exercise.  In other words, each share of stock has a basis that's the same as the "fair market value" used by the employer to calculate the compensation created by the exercise.  The stock broker's 1099-B will report the cost basis as the out of pocket exercise price, but that needs to be adjusted to include the compensation element for income tax purposes.

[pr0]

Thank you.  I have a "Stock Plan Transactions Supplement" and there I have an adjusted "Adjusted Gain
(Loss)" column where the NQSO & ISOs show very very small cost adjustments [for example: ($6.20)]

[AmyC]

Then you would be close to zero for gain /loss. Often a small loss due to brokerage expenses occurs. It sounds like you have it!