Adjusting Cost Basis for Qualifying ISO Sales (Capital Gains/AMT)

[wowwitsgau]

Hi,

Exercised ISO in 2017, sold in 2023. Paid AMT in 2017 for the FMV - strike price (bargain element) using form 3921, and thus I do have AMT credits. Selling price in 2023 was higher than the FMV in 2017.

My question is, do I need to adjust my cost basis? After entering my ISO sales, turbotax is asking me to "adjust your cost basis to ensure your best outcome". Do I need to look back at my 2017 3921 to find the correct ISO purchase information (based on the date of exercise) and enter in the original sale information in order to calculate my correct cost basis so that I don't overpay tax? Is this done on the "Capital Gain/Loss Adjustments Worksheet (Part III)"? Also, to complicate things, my company did have a 10:1 stock split; could I just move the decimal point over for any price/quantity fields?

I haven't been doing this in any other previous years; if I have indeed been overpaying tax, is there any way to correct this for the previous years I've been doing it incorrectly?

Help is appreciated, thanks!

[DavidD66]

Let me start by saying Incentive Stock Options (ISOs) when they are exercised and held past year end get complicated.  Let's start with something easy, the stock split.  A split doesn't do anything other than change the trading price of a stock.  So yes, you can just move the decimal one place.  

When you exercised your ISOs and held the stock past December 31 that year you had AMT income equal to the bargain element of your ISOs.  The bargain element is the difference between the exercise/strike price and the value of the stock at the time you exercised the options.  That amount is an AMT preference item.  ATM is just an alternative way to calculate taxable income and the corresponding tax.  If the AMT "income" from the ISOs was enough for your AMT tax to exceed your ordinary tax, you had to pay the AMT amount.  

In some situations, ISOs being one of them, you receive an AMT credit when you have to pay AMT. The AMT credit allows you to offset your eventual capital gain when you sell those stocks by applying your previously-paid AMT against your capital gains tax.  There is a limit on how much of your AMT credit you can use in a single year.  You can't take an AMT credit that results in your paying less than the amount of regular tax liability.

What that means is that if you have paid a high amount of AMT due to ISOs or another unrealized profit, it can take years to recover the entire amount of your credit. But you can carry the credit forward up to 20 years.  The AMT credit is calculated and carried forward using Form 8801.  

You should have been carrying forward Form 8801 every year starting with the year you exercised and sold your ISOs.  

When you sell the stock that you got from exercising the ISOs the cost basis for regular tax is the price you paid for it - your strike/exercise price.  It is NOT the amount you used for AMT. 

You will need to use Form 6251 to see if you have any AMT which you can offset with the credit on Form 8801 that you should have been carrying forward each year.