Exercised Stock Options - W2 and a 1099-B?

[Don C3]

I exercised stock options in 2021.  I received a W2 for the proceeds (including tax withholding).  However, I also received a 1099-B for the proceeds.  Am I being taxed twice for the same money?  Is this correct?

[GeorgeM777]

You should not be taxed twice and your 1099-B may reflect shares sold to cover your company's tax withholding obligations.  What type of incentive stock plan do you have?  For example, is it a Employee Stock Purchase Plan (ESPP)?  Or is it just a stock incentive plan that allows you to purchase shares in the company below the market price?  In either case, the bargain element, which is the discount you received when you exercised the option, is generally taxed as ordinary income.  It might be included on your W-2, or it may be up to you to include that income on your tax return.

Because you received a 1099-B reflecting sale proceeds, did you sell the shares you purchased after exercising the option?  If you did, the sales proceeds you see on the 1099-B will not be included on your W-2.  Thus, you won't be paying tax twice on the sale proceeds if you include them on your tax return.

Depending on the incentive stock plan, companies may be obligated to sell shares to cover their tax withholding obligations.  Generally, these "sells to cover" are done at the same price as the option exercise price so there is neither a gain or loss to report.  However, to the extent there is a difference in prices, the employee may have a gain or loss to report, and if commissions/fees were charged, the employee will want to include those commissions/fees in their cost basis when determining their gain or loss.  

Don C3

[msyunger]

The question was for 2021 taxes, but I have the same question for 2023 -- not sure if tax law changed.

If I understand the language, "exercising" the options is the buying of the shares.  So, I would have bought the shares at the option price and sold them at market price, generating a gain.

I have received both a 1099B and W2 for the same transaction.

Turbo Tax has recognized these as separate transactions, and I am being taxed twice.

Am I missing something?

[SteamTrain]

.......for the 1099-B.....since the gain was reported on yoru W-2....You are supposed to update the Cost Basis for the stock to be the same as the sales price on the date you bought and immediately sold.  The proceeds will be slightly lower and a small loss if brokerage fees reduced the total proceeds.

That removes the double-taxation

TTX has a long explanation on how to do this....See Example #2 here for details....it applies to both NQSO's and ISO's where an immediate exercise&sale was done:

Non-Qualified Stock Options - TurboTax Tax Tips & Videos (intuit.com)

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If you bought them and held them for a while, then perhaps one of the other options applies....but the help article is specific to NQSO shares for some of those situations..

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..and ISO's purchased and held for over a year have different details involved.

Incentive Stock Options - TurboTax Tax Tips & Videos (intuit.com)

[hsharfstein]

Would it be fair to say that the way to avoid double-counting the proceeds from exercising a NQSO is to report the employer's W-2 as provided and revise the 1099-B by adjusting the cost basis (line 1e) to reflect the for which the shares were sold (i.e. proceeds), rather than the value of the grant at the time it was made, as the 1099-B currently shows.  Is that how to avoid the double-counting?  However, that will cause Schedule D of the tax return to differ from the 1099-B the IRS received from the stock broker.  Is that OK? 

[DawnC]

It depends; sometimes you have to make adjustments to the basis.  Exercising options triggers a tax bill and how much tax you pay when you sell the stock depends on when you sell it.   You pay tax on the difference between the stock price offered in the option and the stock's fair market value.  The compensation element is basically the amount of discount you get when you buy the stock at the option exercise price instead of at the current market price.  You calculate the compensation element by subtracting the exercise price from the market value.  

• The market value of the stock is the stock price on the day you exercise your options to buy the stock. You can use the average of the high and low prices that the stock trades for on that day.
• The exercise price is the amount that you can buy the stock for according to your option agreement.

Employers must report the income from a 2022 exercise of Non-qualified Stock Options in Box 12 of the 2022 Form W-2 using the code “V.”   The compensation element is already included in Boxes 1, 3 (if applicable), and 5, but is also reported separately in Box 12 to clearly indicate the amount of compensation arising from a nonqualified stock option exercise.

How you report your stock option transactions depends on the type of transaction.  Usually, taxable Non-qualified Stock Option (NQSO) transactions fall into four possible categories:

1. You exercise your option to purchase the shares and you hold onto the shares.
2. You exercise your option to purchase the shares, and then you sell the shares the same day.
3. You exercise the option to purchase the shares, then you sell them within a year or less after the day you purchased them.
4. You exercise the option to purchase the shares, then you sell them more than a year after the day you purchased them.

Each of these four scenarios has its own tax issues as the following four tax examples show, linked here.   Use this guide to determine if you need to add compensation to Form 1040 or adjust your basis on 1099-B.

How Do I Enter ESPP?

@hsharfstein 

[hsharfstein]

Thank you for the reply.  I fall into category 2.  While the link in your reply was broken, I did find the following turbotax article that lead me to the detailed instructions I needed.  

Non-Qualified Stock Options

Written by a TurboTax Expert • Reviewed by a TurboTax CPA

Updated for Tax Year 2022 • December 1, 2022 08:25 AM

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OVERVIEW

Exercising options to buy company stock at below-market price triggers a tax bill. How much tax you pay when you sell the stock depends on when you sell it.

Thanks for your help @DawnC.  For me at least, it is case closed on this issue.