NQSO sale on W2, 1099-B, and capital loss carryover

[taxcaveman]

Hey there! I sold non-qualified stock options last year which was reported on my W2 and on my 1099-B. I also have a capital-loss carryover from the previous year. I think I'm okay with the double-reporting thing by adding an adjustment to the cost basis for my 1099-B, but then TT doesn't see any gains to be offset by my capital loss carryover from previous years and so doesn't calculate it. Any ideas on how to fix that?

[DavidD66 · Accepted solution]

When you exercise and sell Non-Qualified Stock Options (NQSO) there is rarely any significant capital gain or loss on the transactions.  When you exercise the NQSO, the difference between the market price and the exercise (strike) price is considered ordinary income and is reported on your W-2 in box 1 as wages.  Your cost basis in the stock is the amount you paid (the exercise price) plus the amount included in your income.  That combined amount is the market price at the time of exercise.  If you exercise and sell, the stock is sold right away.  This results in no gain or loss on the sale.  Sometimes, due to intra-day market price fluctuations there will be a very small gain or loss.  As you mentioned, the exercise and sale is reported on your W-2 and on a 1099-B.  The broker doesn't report your cost basis on the 1099-B, so you have to adjust the cost basis to reflect the combination of what you paid for the stock (the exercise price) plus what was included in your W-2 income.  

For example, lets say you exercised 100 NQSOs with an exercise price of $25 and a stock price of $100.  The bargain element is $75 ($100 - $25), so you have $7,500 of ordinary income that is included in your W-2 box 1 income.  You are doing an exercise and sell and the net sales proceeds from the sale is $99 per share.  You have an adjusted cost basis of $100 per share - the $25 you paid plus the $75 that was included in your income.  You also have short term capital gain of $100, due to the difference in the market price when exercised vs. the sales price.  If there was no market price difference between the market price at exercise and the sales price, there would be no gain or loss.  So there would be very little or no gain to be offset by a capital loss carryover.

[taxcaveman]

Okay, this makes sense...I did understand that when an NQSO is exercised that it became a taxable event on the difference between the stock price when exercised and the strike price, but I did not make the connection that it was considered ordinary income. It makes complete sense that there isn't any capital gains or losses when sold at the same moment that exercising occurs. 

Thanks for your very detailed explanation, it seriously helped.