1099-B Number of ISOs exercised is lower than shares received after company went public

[Anonymous]

Years ago, I exercised 2500 ISOs when I left a company. When that company went public through a SPAC, I received 2950 shares which I sold this past year.

TurboTax Smart Check is showing a warning, "additional purchase information needed. 2500.0000 of 2950.0000 shares have been accounted for. Need information for additional 450 shares."

Specifically, it wants me edit Employer Stock Worksheet: Line 18. Column (c) , which looks like it wants me to add an additional ISO exercise for what it believes are 450 missing shares.

Since I don't have an additional exercise as my 2500 ISOs converted to 2950 shares somewhere along the line, how do I go about correcting my tax forms so I can submit my taxes?

Thanks for your help.

---

Full Smart Check message:

"Form 1099-B Worksheet (COMPUTERSHARE) -- Capital Asset Sales Wksht (1) -- Capital gn (ls) adjustments/other info (2950.0000sh COMPANY_NAME) -- Employer Stock Worksheet: Line 18. Column (c) additional purchase information needed. 2500.0000 of 2950.0000 shares have been accounted for. Need information for additional 450 shares."

[GeorgeM777]

That depends.  Were your ISOs qualified or non-qualified?  If non-qualified, then when you exercised them years ago you would have been required to pay tax--at ordinary rates--on the difference between price of the option and the fair market value of the stock you purchased.  If qualified, then no tax would be due upon exercise.

There's also the issue of whether your sale was a disqualifying disposition or a qualified disposition.  A disqualified disposition is the following:

• When you sell the stock two years or less from the offering date, known as the "grant date," the transaction is a disqualifying disposition.
• Or if you sell the shares one year or less from the "exercise date," which is when you purchase the stock, that is also considered a disqualifying disposition.
• In both cases, the compensation should be reported on your Form W-2.  However, because you are no longer with the company, you may have to include the sales proceeds as wages on Form 1040. 

A qualified disposition is the following:

• more than two years passed between the grant date and the sale date, and
• more than one year passed between the exercise date and the sales date.

In a qualifying sale, the employer will not report any compensation amount for this sale; however, the taxpayer is still responsible for paying capital gains tax.  

If you can provide some additional information, we can provide a more focused response.  In the alternative, here is a link to a TurboTax article which addresses ISOs in a fair amount of detail.  The article also contains a link to Non-Qualified Stock Options.

Incentive Stock Options

@Payroll7052

[Anonymous]

Hi @GeorgeM777,

Thanks for responding.

To answer your questions:

• Were your ISOs qualified or non-qualified?
  • qualified
• There's also the issue of whether your sale was a disqualifying disposition or a qualified disposition.
  • qualified disposition (ISO grant date was in 2015, ISO exercise data was in 2016, sold shares in 2022)

My shares also qualify for the QSBS exclusion under Section 1202.

I was able to fill out everything in TurboTax up until the point that I received the Smart Check warning that the number of shares from exercised ISOs is less than the number of shares I sold. While the warning is accurate, the numbers I entered for exercised shares and shares sold are correct. At some point, possibly during the company's SPAC, the conversion from my existing (exercised) shares to new shares was not 1:1. How do I enter this information in TurboTax so I can pass Smart Check?

Thanks for your help.

[GeorgeM777 · Accepted solution]

Because the TurboTax screens that address ISOs request information about "shares exercised," "shares purchased," and "shares sold," it may work better to enter the number of shares you received--2,950--rather than the 2,500 that were exercised years earlier. At this point, it's not clear why the difference exists; however, for tax purposes, you did receive and sell 2,950 shares and if you work with that number of shares, you should be able to clear the error in TurboTax.  

You may have already reviewed the screens that relate to Qualified Small Business Stock, but if not, there are screens that address the qualifications for QSBS.  After entering your information about your ISOs, you should see the following screens:

1. Stock Option Lot Summary, Select Done
2. Your Incentive Stock Option (ISO) Results, Select Continue
3. Select any less common adjustments that apply, check the box The gain (or loss) from this sale is eligible for special treatment because it's from qualified small business stock...
4. On the following screens, there will be questions about your QSBS.

Assuming you meet the requirements for the sale of QSBS, TurboTax will apply the Section 1202 adjustment.

@Payroll7052