1099-NEC + 1099-B for stock options - how to report?

[clausiam1]

I had stock options at a company I left in 2022. When I left I exercised the option. Later in 2022 the company did a funding round and my stock was sold to the new investor. I have received both a 1099-NEC for the "income" representing the difference in my purchase price and the FMV at time of exercising, and a 1099-B for the proceed from the following sale. The 1099-B does not show any cost basis. I'm now unsure how to file this. Let's do an example with round numbers to illustrate it:

Cash paid by me at time of exercising: $10,000

FMV at time of exercising: $40,000

Sales price: $100,000

My 1099-NEC lists income of $30,000 (FMV minus price paid; it does not detail the FMV and the price paid, just the difference)

My 1099-B lists proceeds as $100,000

Since the stock was sold in the same year it was purchased, my taxable gain should be $90K (100-10) and the FMV should be irrelevant. However, Turbotax sees both as taxable income, i.e. income of $130K instead of $90K.

How do I report this correctly so I'm only taxed on the $90K? I cannot just omit the 1099-NEC since it's reported to the IRS.

[MinhT1]

You have to report the form 1099-NEC as the difference between your exercise price and the FMV at the time is taxed as ordinary income.

When you sell the stock, your cost basis is $40k ($10k exercise price + $30k taxed income) and your capital gain is $60k. When entering your 1099_B, you should enter $40k as your cost basis.

[clausiam1]

Thank you. 

"When you sell the stock, your cost basis is $40k ($10k exercise price + $30k taxed income) and your capital gain is $60k. When entering your 1099_B, you should enter $40k as your cost basis."

That makes sense. However, how can the IRS verify where the $40K cost basis comes from? The 1099-NEC and the 1099-B seem unrelated and the 1099-NEC just says $30K (the $10K purchase price is not reported anywhere [I can find it in Carta, but it's not furnished to the IRS afaik]).

[MinhT1]

If the IRS wishes to verify your declared cost basis, they will write to you and you can show them proof of the $10k exercise price and the reported $30k on the 1099-NEC.

[portKey]

Thanks for this. I have a very similar case in which the ESOPs were cancelled as part of a cashless exercise and we received 1099-NEC for the transaction. I understand that the 1099-NEC amount is taxed as ordinary income.

Do I also have to pay self-employment taxes on this portion or is it just the income tax. As far as I can tell, this payment does not fall under IRS's definition of "You're in a self-employed trade or business if your primary purpose is to make a profit and your activity is regular and continuous.".

However, if not SE income, this 1099-NEC is being asked to be reported under line 8j of Schedule-1 which reads "Activity not engaged in for profit income". Is that correct?

[ThomasM125]

This is correct. The income you received from the discount on the purchase price of the stock is ordinary income that should not be subject social security or self-employment tax.