How do I file a ISO Disqualified Disposition, where W-2 only reported the bargain element and selling price was lower than exercise FMV?

[PanSola]

I exercised ISO in 2016 and sold them in 2017 (<12 months), selling below the exercise FMV.  As I understand it, my ordinary income for 2017 regular tax with respect to these stocks should be calculated from my 2017 sell price.  However on the 2017 W-2 I received, the income was calculated with the spread on my exercise (using the FMV at the time of exercise in 2016).  How do I report/reconcile the difference between the W-2 I received and the actual disqualified disposition ordinary income?

My situation is similar to #3 in the following link:

https://turbotax.intuit.com/tax-tips/investments-and-taxes/incentive-stock-options/L4azWgfwy

with the main difference that my W-2 showed my bargain element as opposed to actual gain.

[TomYoung]

Why not ask your employer for a corrected W-2?  That's the best route.

[PanSola]

My (former) employer says the amount on the W-2 (the bargain element) is what they need to report to the IRS, even though I told them that is not the ordinary income amount I need to file my taxes for.

[TomYoung]

Refer the employer to U.S.Code Section 422(c)(2):

(2) Certain disqualifying dispositions where amount realized is less than value at exercise
If—

(A) an individual who has acquired a share of stock by the exercise of an incentive stock option makes a disposition of such share within either of the periods described in subsection (a)(1), and
(B) such disposition is a sale or exchange with respect to which a loss (if sustained) would be recognized to such individual, then the amount which is includible in the gross income of such individual, and the amount which is deductible from the income of his employer corporation, as compensation attributable to the exercise of such option shall not exceed the excess (if any) of the amount realized on such sale or exchange over the adjusted basis of such share.

[PanSola]

Thanks TomYoung!  Looks like this info is just what I need.

[Anonymous]

qualified or non qualified ISO?

Qualified Incentive Stock Options

An ISO that is "qualified" allows you to escape personal taxation of any profit made in the exercising and subsequent sale of the ISOs. This comes in the form of two separate tax savings. At the point the option is exercised, you are exempt from paying tax on the gain between the option-grant price -- when the option was issued -- and the time-of-exercise value of the stock. Secondly, at the time you sell the stock, the profit on the sale qualifies for taxation as a long-term capital gain, usually a lower rate than personal income.

Non-Qualified Incentive Stock Options.

Incentive stock options disqualified from tax savings may take a double hit. The spread between issue and exercise prices is taxed at your regular income rate in the year of exercising. For example, an option for 100 shares at $20 per share will cost you $2,000 to exercise. If stock currently trades at $25 a share, you are taxed on the $500 spread as though it were income. The same is true if you sell your stock within a year of exercising. Twelve months after the date of exercising it becomes taxed as a capital gain.

[SteamTrain]

Yeah, sometimes you have to make sure..BUT

It had to be  an ISO, with a non-qualifying disposition (sale under 12 months holding).
...he said he exercised in 2016.  

1)  IF it was an NQSO, even if he held the stock, then he would have already received the income statement showing on his 2016 W-2.

2)  But he indicated exercised in 2016, sold in 2017, but under 12 months.....with a 2017 W-2 showing the income.  A 2017 W-2 would only be issued if it was an ISO.

He also specified situation #3....which matches what he indicated:
<a rel="nofollow" target="_blank" href="https://turbotax.intuit.com/tax-tips/investments-and-taxes/incentive-stock-options/L4azWgfwy">https:...>
_________________
@TomYoung                or is my thinking wrong...

[TomYoung]

From the OP's statement it does appear to be an ISO and I hope the OP thought to report the exercise using the "ISO Exercise and Hold" interview just in case there's an AMT issue lurking.

[PanSola]

Hi.  It was an ISO that was sold less than 12 months from it was exercised, which made it a disqualifying disposition.

The exercise (and hold) took place in 2016, and I did pay quite a bit in AMT for the 2016 tax year. I'm expecting to be able to use a portion of the AMT credit for the 2017 tax year.

[PanSola]

Hi TaxPro+40, according to the TurboTax article,
<a rel="nofollow" target="_blank" href="https://turbotax.intuit.com/tax-tips/investments-and-taxes/incentive-stock-options/L4azWgfwy">https:...>
if I exercised in late 2016 and sold in early 2017, and sold below the exercise FMV, only my actual gain is supposed to be taxed as ordinary income for the 2017 tax year.

Eg. If I exercised at $20 when FMV was $25, and sold at $24 the following year, my ordinary income for regular tax should only be based on the $4 difference.