I early exercised my ISO in 2021 that will be vested in both 2021 and 2022, I did not file the 83(b) election form. 1. for these early exercised ISO, should I pay tax on AMT or regular income tax for the price difference ?
2. since I did not file the 83(b), the amount i should pay is the FMV(at vested time) - strike price, since these ISO will be vested in a monthly cadence, where should I find the FMV ? Ask my employer or i have to trace back for all the transaction the find the FMV for every month when vested ?
3. regardless of tax upon AMT or regular income, for 2021 tax filing, i only need to handle the portion that's been vested in 2021 ? For the rest part that will eventually be vested in 2022, i should handle them in 2022 tax filing, e.g. in 2023 April?
4. If these tax should go into AMT, where can i enter the information in turbotax ? Enter every month vested FMV - strike price and quantity for 12 months ?
When you have Incentive Stock Options (ISOs), you cannot "exercise" those options until they vest. Vesting is what gives you the right/ability to exercise the options. There are multiple scenarios, each with different tax consequences, for exercising and selling your ISOs. For more information, see the following TurobTax article:
@DavidD66 Thanks for the reply, but I do have option that allow early exercise and I have already exercised them, but I did not file the 83b election in time, which make my case more complicated and beyond my knowledge.
@zaka634 When you 'early exercise' your stock options it just means you're fully vested earlier. Your employer is giving a shorter vesting process as an additional incentive.
There are a number of online tools that will give you the historical FMV of a stock using the ticker symbol and the date. Just document which tool you're using and what the historical value is so you can reproduce it if necessary.
For 2021 (provided you don't sell these stocks) the only thing that needs to be entered is the difference between the FMV on the date that you exercise it and the amount you were able to exercise the options for. This is called the 'bargain element' and it reported only for AMT purposes.
To report this for 2021 (again, assuming you did not sell these shares in the same year), type 'Form 6251' in the search box and click the 'jump to' link. Follow the prompts in order to get to the necessary section.
@RobertB4444 , thanks for the reply! I did not sell these early exercise ISO.
If i'm understanding your reply correctly, for all the early exercised ISO, i should only need to file the spread between FMV and strike into AMT portion, e.g. use the 6251 form? No need to worry about the regular income tax bracket ?
But will the FMV be the every month price when my early ISO vested or just the FMV when i early exercised ISO ?
Let's say i early exercised 20,000 ISO in Jan/2021, FMV was $10, strike price $2, ISO vested in a monthly cadence.
12,000 of them fully vested to me via the 12 months in 2021 and 80,000 will be vested in 2022.
For 2021, should I only need to file the 12,000 ISO vested in 2021 or all the 20,000 ISO ? I read some articles saying that without 83(b) election, the spread will be the FMV (when ISO "real" vested ) less the strike prices, since the stock prices varied for 12 months in 2021, do i need to find every month stock price at vested time and calculated the spread accordingly ?
Or i just calculate the whole AMT amount as ($10 - $2 ) * 20,000 ? If so, how will this be different from filing a 83(b) election ?
I tried to do the "ISO exercise and hold" directly in turbo tax, it seems calculate the spread into regular Federal income tax, which is very confusing. Please advise, thanks.
Still not sure that these early exercised option should be treated as income tax or pure AMT. Since I did not file 83b, should i check the every month FMV and calculate the difference accordingly for the total taxable amount ?
@zaka634 If you scroll down to 'Less Common Investments and Savings' the last option is 'ISO Exercise and Hold'. You will enter all of your information here and TurboTax will enter it into form 6251 for you.
Also, your basis should be calculated using the FMV on the date of the exercise.
@RobertB4444 thanks for reply again, i saw this paragraph
"
It is critical, when early exercising an option that the Section 83(b) election is properly and timely filed. If it is not timely filed, then (i) instead of having income at the time of making the election, there will be compensation income to the holder of an NSO (or AMT income to the holder of an ISO) equal to the difference between the purchase price (i.e., the exercise price paid) and the fair market value of the stock on each vesting date and (ii) the capital gains holding period will begin after the restricted stock vests. Again, any compensation income would be subject to all applicable income and withholding taxes (which the company must ensure can be satisfied)."
Since I did not file 83b, I think I should calculate the spread for AMT tax based on FMV each month when RSU( converted via ISO) vested and my exercise price?
If I use the FMV when early exercise as the basis, then file 83b or not will make no difference ?
@zaka634 You are correct - you will need to calculate the FMV on each vesting date. I buzzed right by the "I didn't file form 83b" bit and I shouldn't have. Sorry about that.
No worries, I really appreciate your replies, I got a couple different answers from different places and really lost myself, so trying to figure out what is the right action on this, and also trying to confirm with my employer.
Another version of answer I got is that since I did the early exercise for the ISO, these ISO had been converted into restricted stock, because 83(b) election was NOT filed, no AMT on the exercise action, instead, when these restricted stocked vested, I should be taxed as ordinary income, but my W2 has no such information, and I can't find a place to fill this in these information in TurboTax, still lost my head in the middle of the mist.
@zaka634 Unfortunately that's correct. Your stock vesting creates ordinary income. You can enter that under 'Other Income' in TurboTax in order to get the tax bite out of the way.
@RobertB4444 thanks for the confirmation and let me know the "other income" section TurboTax, going to confirm with my employer whether these restricted stock should be reported via W2 or not, otherwise, I'm responsible to pay the ordinary income tax immediately after vesting, on the other hand, I'm currently not paying any income tax on these restricted stock on vesting dates, I think I will be penalized on these late tax payment events. Thoughts these restricted stock should be taxed as my RSU, but maybe my employer is doing things differently.
Can't find a place in turbotax to fill in these early exercised ISO. For all the RS(restricted stock) acquired via early excised ISO, i should report the ordinary income based on the spread between FMV(vesting date) - strike_price, but there is no place for me to enter this kind of information.
Other income not already reported on a Form W-2 does not allow me to do anything since it's saying any income more than $2,300 should be reported on W-2, for the last other reportable income, it's very sketchy, just put a number which does not seem like a proper place. Thanks in advance.
@zaka634 I've never heard of the 'Other reportable income' section referred to as 'sketchy' before but it did make me laugh.
That is indeed where you should enter it. Your employer should really be reporting this on your W2 but since they're not this is where to put it. Make the description as detailed as possible and you will be fine.
@RobertB4444 , thanks you so much for your reply, sorry for the word "sketchy" if that's offending, first time going through the IPO with all the crazy event, I'm pretty ignorant here, :).
I'm still arguing with my employer that these restricted stock should be reported on my W2 once they vested in 2021, just like any regular RSU vest, not sure if they will correct it.
A separate thing, I don't know if you work for TurboTax or not, can I nominate you as my tax reviewer in TurboTax, I trust you and am willing to pay you for your extremely helpful answer and generous attitude to help folks like me, thanks in advance again.
Hmm, found two websites on my ISO topic :
No 83(b) election and qualifying disposition
If you don’t make an 83(b) election, there are no tax implications at early exercise for the AMT or federal tax. Instead, when the shares vest, the spread between the strike price and FMV at vesting is income for AMT. To meet the terms for a qualifying disposition, you’ll need to hold the shares for 1 year after the shares vest (not when you early exercised) and 2 years from the grant date.
This seems wrong according to our discussion and can cause other future readers to make a wrong decision based on the incorrect information, wondering if I should contact them to correct their post.
@zaka634 If you receive an option to buy stock as payment for your services, you may have income when you receive the option, when you exercise the option, or when you dispose of the option or stock received when you exercise the option.
Under the Investment Income section of turbotax there is a section ISO excercise and hold where you will enter the details to your information.
There is also youtube video on how to enter them in tt https://www.youtube.com/watch?v=66Gzu9vZqb4&t=13s
The IRS has issued two forms (and instructions): Form 3921 is used to report ISO exercises, and Form
3922 is used for ESPP share purchases. A separate form must be provided and filed for each exercise or
purchase during the calendar year. Are there penalties for noncompliance?
The Internal Revenue Code imposes a penalty of between US$50 and US$270 for each statement that is
not timely and/or correctly filed (with the penalty increasing within that range depending on the degree of
delay beyond the deadline), up to an aggregate annual limit of US$3,339,000. If an employer intentionally
fails to provide a required statement or the correct information on the statement, the penalty is a minimum
of US$550 per statement, with no maximum penalty. These penalties will apply separately for the
information statement to be provided to the employee or former employee and the return to be filed with
the IRS. If a corporation fails to provide both, the penalties and cap are doubled. Smaller penalties apply
to “small businesses” (generally those that have average annual gross receipts of US$5 million or less for
the three most recent tax years (or for the period in existence, if shorter) ending before the calendar year
in which the information returns were due).
If your employer grants you a statutory stock option, you generally don't include any amount in your gross income when you receive or exercise the option. However, you may be subject to alternative minimum tax in the year you exercise an ISO. For more information, refer to the Instructions for Form 6251. You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don't meet special holding period requirements, you'll have to treat income from the sale as ordinary income. Add these amounts, which are treated as wages, to the basis of the stock in determining the gain or loss on the stock's disposition. Refer to Publication 525 for specific details on the type of stock option, as well as rules for when income is reported and how income is reported for income tax purposes.
Incentive Stock Option - After exercising an ISO, you should receive from your employer a Form 3921, Exercise of an Incentive Stock Option Under Section 422(b). This form will report important dates and values needed to determine the correct amount of capital and ordinary income (if applicable) to be reported on your return.
Employee Stock Purchase Plan - After your first transfer or sale of stock acquired by exercising an option granted under an employee stock purchase plan, you should receive from your employer a Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan under Section 423(c). This form will report important dates and values needed to determine the correct amount of capital and ordinary income to be reported on your return.
@maglib @RobertB4444 @GeorgeM777 ,
thanks yall for the great help here and I truly appreciate it. Verified with my employer that these early exercised ISO without 83(b) election will only be taxed on AMT, no ordinary income, since no 83(b), i will have to manually calculate the spread between FMV when these early exercised ISO vested and the exercised price, so I literally have to do this calculation per month since my original ISO is vesting on a monthly cadence. Once again, thanks for the help.
Hi, I have the same issue.
Are you saying that for early exercised ISOs without 83(b), the spread between FMV at each vesting and exercise price should be added up each year and reported for AMT and should not be added to W2 as compensation income? Does it mean that the original W2 doesn't need to be corrected? Can you please confirm? Thanks.
I'm not sure for your case since I'm lacking information, not sure your W2 situation.
Assuming you did not sell early exercised ISO, and you did not file 83b, then the AMT amount will be the FMV when these "iso" vesting less your exercise price. The issue here is that if your companys FMV keep increasing regardless of going public or not, you will owe more and more AMT tax.
@zaka634 Thanks for your prompt response!
I left the company within 2 weeks of ISO early exercise and didn't get the 83b form from the company and thus didn't file.
The spread was not put in W2 and I received the 3921 form for the ISO exercise one year later. All unvested ISOs were repurchased by the company on my last day at the exercise price. The vested shares at the time of early exercise were sold one year after the exercise and 2 years after the grant.
The company doesn’t provide tax advice. I checked with a local tax advisor who is small business certified and was told the spread should be treated as ordinary income. This aligns with some of the previous suggestions from other members in this thread but your approach seems to be reasonable too. Not sure how you figured out the approach. Any documentation supporting that? Thanks again and I highly appreciate your time and help.
@happyfeifei , our case is different, I did not sell exercised iso. Based on your reply, you sold your early exercised iso, but you sold it 2 years from grant, one year from exercise, since it's not one year from vest date, your sale is disqualified sale, which means,the spread will be ordinary income, if your employer did not included it in your W2, then you can report it via other reportable income like Robert suggested me to do. My case is that I did not file 83b and I'm not selling any thing, so I only meet to handle the AMT portion. Regarding the document, my employer provider these information internally, I just ignored them before. You can find it from th b IRS pub 525 regarding iso and AMT.
Thanks @zaka634. Sorry I didn't make it clear. The early exercise occurred in 2020. I sold the vested ones in 2021, one year after the vest.