How do I indicate that compensation income from an ISO sale is on a W-2?

[tewill3]

In 2021 I sold ISOs, which I exercised in 2020, as part of a company acquisition. Because the sale was less than a year after I exercised them, they were sold as a disqualifying disposition and the compensation income is reported in box 1 of a W-2. The total proceeds are listed on a 1099-B. The cost basis is not listed, but I know it is (exercise price x number of shares)   compensation income, and TurboTax Premier online correctly indicates the capital gain.

The problem is I can’t find how to indicate that the compensation income is on a W-2. Therefore, TurboTax is saying I have a penalty for underpayment of estimated taxes as none were withheld on that W-2. But as that W-2 shows compensation income it’s correct that no taxes were withheld.

Does anyone know how to indicate that the compensation income for this ISO sale is on a W-2 so I don’t get an underpayment penalty? Thanks!

[HelenC12]

Since the gain on that stock sale was included as income on your W-2, to avoid double taxation:

• You will need to change the stock basis on the date of the sale, to the price on the date of sale.  
• The result is zero gain or a minor loss due to brokers commission/fees.  
• The IRS will expect to see that information on your tax return.  

For additional information, see the TurboTax article: Non-Qualified Stock Options

[tewill3]

Thanks for the reply. I’m not having an issue with recording the cost basis; if anything, my issue is that I’m using an adjusted cost basis, where it’s the price I paid plus the compensation income. My concern is that there doesn’t’ appear to be a way in TurboTax online to indicate that the cost basis includes compensation income that appears on a W-2 (and is therefore being taxed as regular income). And these are ISOs, not NSOs

[AmyC]

The ISO is in your w2 box as wages. That same dollar amount is what creates your basis- plus fees. Since you are showing the w2 income as basis, it is being reported so that you are only being taxed on it as wages, not as both wages and stock options. When you sell the ISO, you will enter the correct basis so that you are not double taxed on the same income.

Don't forget, the AMT that goes along with the ISO as well along with the potential $100,000 limitation. If you know you are getting ISO, you always want to plan ahead for the tax and alternative minimum tax.

See Topic No. 427 Stock Options

[tewill3]

Thanks. I was assessed AMT when I exercised the ISOs in 2020, and in 2021 I sold them. My concern for 2021 is I’ve read that at least in previous versions of TurboTax online (and maybe even the current version of the desktop app, which I’m not using) when recording a transaction from a 1099-B for ISOs you could indicate that the compensation income is on a W-2. I can’t find a way to do that using TurboTax Premier online and am uncertain whether that’s a problem, i.e. does the IRS need to explicitly know that the adjusted cost basis includes compensation income that appears on a specific W-2 included in the return.

[ThomasM125 · Accepted solution]

The IRS does not need to know how you arrived at your cost basis, so you don't need to report to them that your cost basis includes income reported on a form W-2. You do need to insure that the ordinary income portion of the transaction gets reported as income on your tax return, but that normally comes about by virtue of your employer reporting it on your W-2 form, in box 1.