NSO Stock Options exercised and sold, but no tax documents

[clausiam]

Last year I left a privately held start-up company in which I had some NSO options. On leaving I exercised my options at the set price. A few months later they did a funding round and I was able to sell my stocks to the new investors at fair market valuation. No taxes were withheld and I got a check for the full amount. I paid estimated federal and state taxes immediately. Now it's time to do my tax return. I have received my W-2 from the company but it does not make any mention of the sold stock. I have not received a 1099-B. The transaction was done via Carta.

Questions, 1) shouldn't it appear on W-2 or a 1099-B? and 2) how do I report this on my tax return? Is the income earned simply "my selling price minus my exercise price" and that difference is taxable as income or as short-term capital gains?

[GeorgeM777]

1. Yes, generally you exercise your option through your employer, and your employer will usually report the amount of your income on line 1 of your Form W-2 as ordinary wages or salary and the income will be included when you file your tax return.    Your company will usually withhold ordinary income tax (including federal, payroll and any applicable state taxes).  If there was no cash involved in the transaction, you might have paid your employer the cost of the withholdings at purchase.
2. When you exercise a non-statutory stock option (NSO), you're liable for ordinary income tax on the difference between the price you paid for the stock and the current fair market value.  And yes, the taxable capital gain for NSOs is calculated by subtracting the FMV of the stock on the day you purchased your shares from the sale price.  Because it appears that you held your NSOs for less than one year, the gain/loss is short-term gain/loss.  

@clausiam
 

[clausiam]

Thanks for the reply.

Definitely no income taxes withheld at time of exercising or anything on the W-2.

Since my exercising/purchase and my selling them happened in the same year, the FMV doesn't matter does it?

Maybe an example is the best way to illustrate it. Numbers aren't the real one, but principle.

February 2022: On exiting the company, I exercised and purchased 50,000 options at $0.20. Paid employer the $10K directly. The FMV at the time was $1.40 per option.

April 2022: Company did a funding round and my stocks were sold at $2.00 each = $100,000. 

So, I should now pay short-term capital gains tax on the earnings (i.e. $100K-$10K=$90K).

But the difference between my $0.20 price and the FMV at the time of purchase ($1.40-$0.20=$1.20, total of $60K value increase) is irrelevant since the stock was sold later in the same tax year at a higher price on which I'm already paying taxes on that total gain.

Is that all correct?

[GeorgeM777]

No, and thanks for the additional information.  Because your options were non-qualified, you don't get the preferential tax treatment of having sold incentive stock options.  When you purchased the NSOs at a price of 20 cents, the FMV of those options was $1.40 for a difference of $1.20.   You owe tax, at ordinary income tax rates, on that difference.  Multiply the number of shares you purchased by $1.20 and the resulting amount is taxed at your ordinary income tax rate.

Your short term gain is the difference between the FMV of the NSOs on the day of your purchase--$1.40--and your sales price, $2.00.  Thus, subtract from the gross proceeds of $100,000, the FMV of the NSOs on the day of purchase.  

@clausiam