Do I need to file Form 3921 even if I didn't sell?

[Stephenpalmi]

Hi, I exercised stock options in 2021. I received form 3921, but I never actually sold any of the options. Do I need to add this information in when filing my taxes? If I add it in, I have an additional $2000 due, which seems like a lot. Not sure if I only need to add this info in if I end up selling a portion of my stocks.

[MayaD · Accepted solution]

You need to report form 3921on your return. Your tax liability changes if you are subject to AMT. 

In the year that you exercise an Incentive Stock Option, the difference between the market value of the stock on the exercise date and the exercise price counts as income under the AMT rules, which can trigger an AMT liability. 

However, you will also generally earn an AMT credit in that year which can reduce your tax bill in later years. 

For more information. please check: Incentive Stock Options

[Stephenpalmi]

Thank you! Does this mean I need to fill this portion out in the Form 3921 section or the AMT section?

[MayaD]

In the form 3921 section.

Here is where you report the information:

1. Open your TurboTax online account
2. Click on Federal on the left-hand side of the screen
3. Click on Wages & Income
4. Scroll all the way down to Investment Income > Click on Show More
5. Click Start next to ISO Exercise and Hold

[hechkas]

I am reading in few sites that if the acquired stocks through ISO is not transferable (owner can not sell and there is a lock up period until 180 days after the IPO).  Also, it has a restriction that in case of selling the stock has to be sold to the company only and no body else.  Therefor, the ISO of a small start up is different of a big company like Microsoft.  The stock acquired has no value and it can go down to zero and company never make it to IPO or gets acquired.  Therefore, paying AMT on an income that is fictitious and does not have value does not make sense.  Here, is an excerpt from Investopedia about this subject of adjustment under line 2i of AMT form.

"However, the adjustment is required only if your rights in the stock are transferable and not subject to a substantial risk of forfeiture in the year the ISO is exercised. And the fair market value of the stock for purposes of the adjustment is determined without regard to any lapse restriction when rights in the stock first become transferable or when the rights are no longer subject to a substantial risk of forfeiture."

[DianeW777]

Yes.  According to the IRS you must have the full rights of the stock.  Review the example in Publication 525, page 14, under restricted stock.

Also, if you do not have unrestricted access to the stock at the end of 2021, you should enter the information in 2022 when the stock is no longer restricted.  Keep the information in your files with all the detail you need to support your position.

Until the property becomes substantially vested, it's owned by the person who makes the transfer to you, usually your employer. However, any income from the property, or the right to use the property, is included in your income as additional compensation in the year you receive the income or have the right to use the property. When the property becomes substantially vested, you must include its FMV, minus any amount you paid for it, in your income for that year. Your holding period for this property begins when the property becomes substantially vested.

Transferable property. Property is transferable if you can sell, assign, or pledge your interest in the property to any person (other than the transferor), and if the person receiving your interest in the property isn't required to give up the property, or its value, if the substantial risk of forfeiture occurs.

[hechkas]

Thank you DianeW777.

the following is from my ISO agreement.  I think it constitutes that I don't have the right to transfer until 180 days after IPO.  Also, there is paragraph that states , if I want to sell before then, I have to get Administrator's approval.  What do you think?  Thank you.

Lock-Up Period. Participant hereby agrees that Participant shall not offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any Common Stock (or other securities) of the Company or enter into any swap, hedging or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Common Stock (or other securities) of the Company held by Participant (other than those included in the registration) for a period specified by the representative of the underwriters of Common Stock (or other securities) of the Company not to exceed one hundred and eighty (180) days following the effective date of any registration statement of the Company filed under the Securities Act (or such other period as may be requested by the Company or the underwriters to accommodate regulatory restrictions on (i) the publication or other distribution of research reports and (ii) analyst recommendations and opinions, including, but not limited to, the restrictions contained in NYSE Rule 472(f)(4), or any successor provisions or amendments thereto).

[DianeW777]

According to IRS Publication 525 you must report it for AMT purposes once it becomes transferable by you without restriction. This means that if the restriction period ends in 2022, then you will report it in 2022 unless you sell the stock in 2022.  

Example 7. Your employer, Elm Company, granted you an ISO on April 8, 2020, to buy 100 shares of Elm Company at $9 a share, its FMV at the time. You exercised the option on January 7, 2021, when the stock was selling on the open market for $14 a share. On January 27, 2021, when the stock was selling on the open market for $16 a share, your rights to the stock first became transferable. You include $700 ($1,600 value when your rights first became transferable minus $900 option price) as an adjustment on Form 6251, line 2i.

 If you exercise an ISO during 2021, you should receive Form 3921, or a statement, from the corporation for each transfer made during 2021. The corporation must send or provide you with the form by January 31, 2022. Keep this information for your records. You will need this to know your cost basis.

@hechkas