Stock option sale - Information is not reported on W-2, did not receive any forms - how to report on Turbo Tax for 2019?

[Individual131415]

Hello,

I would really appreciate it if anyone could help me figure out how to correctly report my stock option income correctly for 2019. 

In 2018, I received some stock options from the small privately held company that I worked at. The agreement specifically states "This Option is NOT an incentive stock option under section 422 of the Internal Revenue Code and will be interpreted accordingly", which I think means that these are considered non-qualified stock options (but please correct me if I am wrong). The company was then acquired in 2019, and when it was acquired my stock options automatically exercised. I received a check for the amount of income I received from this sale. This is the only document I ever received - a check from my company for X amount of money.

This income did NOT appear on my W-2, and I did NOT receive any other sort of forms (no 1099s, etc.). 

I can't seem to figure out how to report this income correctly since it did not appear on my W-2 and I don't have any other forms from my company to use to input it. I did find the Schedule D section where it asks for information on a 1099-B for stock option sales, but I did not receive a 1099-B so I am not sure how else to input this income.

Thanks so much to anyone able to offer any insight! Really stressing about this, because I know I'll owe a small amount of tax on this income, but I just can't figure out how to report it correctly.

Edited to add - In case it is important, I am in California.

[maglib]

@Individual131415   any chance they were reported on your w-2 as income in the year received?  If yes, then you will report that income from the w-2 as your cost basis.  Your employer should have reported a portion of basis in one of the 2 years on your w-2 as compensation income. Which would be your basis for the stock sold.  If not then it's other income.

Nonstatutory Stock Options

If your employer grants you a nonstatutory stock option, the amount of income to include and the time to include it depends on whether the fair market value of the option can be readily determined.

Readily Determined Fair Market Value - If an option is actively traded on an established market, you can readily determine the fair market value of the option. Refer to Publication 525 for other circumstances under which you can readily determine the fair market value of an option and the rules to determine when you should report income for an option with a readily determinable fair market value.

Not Readily Determined Fair Market Value - Most nonstatutory options don't have a readily determinable fair market value. For nonstatutory options without a readily determinable fair market value, there's no taxable event when the option is granted but you must include in income the fair market value of the stock received on exercise, less the amount paid, when you exercise the option. You have taxable income or deductible loss when you sell the stock you received by exercising the option. You generally treat this amount as a capital gain or loss. For specific information and reporting requirements, refer to Publication 525.

For some great info from TT on how to report see:

https://turbotax.intuit.com/tax-tips/investments-and-taxes/how-to-report-stock-options-on-your-tax-r...

I hope this was helpful.

[Individual131415]

Hi @maglib 

Thank you for your response! They were unfortunately NOT reported anywhere on my W-2 in any year. My W-2 only shows my regular salary income, nothing about the options anywhere. I did not receive any sort of form/reporting from my employer at all. That's one reason I've been so confused about how to report this income on my return. I saw that it is almost always reported on the W-2, but I can't seem to find how to report the income myself on my taxes if it is not reported anywhere on the W-2 at all. 

I do believe that it is considered a short term capital gain. Just not sure how to report that if it is not on my W-2 and I received no other documents about it besides the check itself 😕

[maglib]

@Individual131415  If I was you I would contact my employer about why the compensation portion of the options were never taxed as ordinary income.

To get around it, just report it as other income not reported elsewhere section and classify it as related to wages for the value received.  Then TT will do calculations for you.  Then when you report them, just put that as cost basis, and no gain/loss recognized and they get appropriate treatment as compensation income. They probably did not have a cost basis originally in 2018.  The issue is your employer did not pay their portion of taxes if it was not reported on the W-2. The positive side is you most likely will get an amended w-2 but you won't owe any taxes, interest on it.

Just in case:

Do you have a brokerage statement about these options? Did you review it?

[Individual131415]

@maglib I apologize for being a little clueless, I don't know as much about all of this as I'd like to, yet, but I'm trying my best to make sure I do this correctly. I am not sure what a brokerage statement is, but I can let you know exactly all the documentation I've ever received about it, which includes:

- The stock option agreement (the document I signed, which lists the number of shares, date of grant, exercise price per share, etc.)

- The check I received for the shares when the company was acquired

That's all I have, and no other forms or reported information, etc.

I also apologize if this is a dumb question, but could you let me know what exactly you meant by, "just report it as other income not reported elsewhere section"? Where would I find this section? I see there are quite a few options listed under "All Income", including things like Wages and Salaries, Self-Employment, Unemployment, Other Common Income, Investment and Dividends, Investment Income, Retirement Plans and Social Security, etc. Is it one of these categories where I can find the place you mentioned to report "other income not reported elsewhere"?

Thanks again for the help, I'm very new to these sorts of things, and I really appreciate it! 🙂

[maglib]

are you sure nothing in box 12 code v of past 2 years w-2's? It really should be and that amount would be part of your taxable income in box 1 then.

Your compensation element is the difference between the exercise price and the market price on the day you exercised the option and purchased the stock, times the number of shares you purchased.

It should be included in your current year w-2 in box 12 code V.

You can report it as other compensation income not previously reported and it should end up on line 7 of your 1040. ONLY if you are certain it was not in your w-2.  Go to Federal Taxes -> Wages & Income -> I'll choose what I work on -> scroll to the bottom and under Less Common Income select Start  for Miscellaneous Income. You'll find all sorts of other income categories in there, find something related to employment/wages (sorry not certain). right description as Compensation element of non-statuary options exercise.

Next, you have to report the actual sale of the stock you acquired and sold (not the options)your 2019 Schedule D, Capital Gains and Losses, Part I. You don't enter the sale as options just enter under

Because you inherently sold the stock right after you bought it, the sale counts as short-term (that is, you owned the stock for a year or less—less than a day in this case). In your example, the date acquired  and the date sold should be the same.

you may have a small gain or loss related to commissions on the sale...  that's it. Report it in the interview for stocks,mutual funds,bonds,other

[Individual131415]

@maglib If you don't mind, I will describe what I did after reading your response, and can you let me know if this sounds correct to you?

I did the second part of what you said first. I went to the "Stocks, Mutual Funds, Bonds, Other" section and input this as a "short term did not receive 1099-B" sale section. I filled out the number of stock, dates, cost basis (I guessed at this, as being the number of shares X the exercise price). It was asking me to find this information on my 1099-B (which I obviously don't have), even though I did choose that "did not receive 1099-B" choice I mentioned previously. When it asked for the brokerage, I left it blank since one was not used. Then it asked me if I knew the adjusted cost basis. I do not know what that means, so I chose "no, I need help with this", and it led me through some questions (where it asked the dates, exercise price, number of shares, the employer this was for, etc.). In this section, it actually had a spot where it had me check a box if this income was included on my W-2. I unchecked it. Once I finished inputting all of this, my estimated tax owed jumped up a BUNCH (to what I would guess is the correct amount if this amount of money were taxed at my ordinary income rate, which I think is correct since it is a short term sale?). 

Does this seem to sound like the roughly correct thing to do? I wasn't sure if I still needed to do that first part that you mentioned, about adding this income under Miscellaneous Income as well. Would doing so cause me to be taxed twice on the amount, since my taxes already jumped up to around where I expected?

Thanks again for your help. I've been on hold with the Turbotax helpline for many hours today with no one answering the phone yet, so I really appreciate having someone help me out.

Edit to add - I did triple check my W-2's since you asked, and I can confirm that it did NOT appear on this year's or last year's W-2. Not in any sections (section 12 is blank for both years). This was for a very small start up company, and it's likely that they simply made a mistake here, causing this issue.

[maglib]

@Individual131415 

Your cost basis is the compensation element of the stock options.  Your compensation element is the difference between the exercise price and the market price on the day you exercised the option and purchased the stock, times the number of shares you purchased. This ultimately would be the amount of the check plus any commission, if any was billed. (Explanation, they charged you to exercise, then you got the shares which you immediately sold, which should be the check you received).  There is a possibility that the check you received was net of taxes too, I can't see any information, that would have been in the brokerage who held your options. Basically you should end up with $0 gain/loss or small loss if you know commissions.

For brokerage name, say your company you work for.

This section should NOT have increased your taxes as your gain/loss should be zero or a loss for the commission portion.  you do not enter anything as options here as you sold shares of stock that you are reporting , not the options. 

The section where you input compensation not reported will be where your taxes owed rise.

Yes you have to report the other income as it must be reported correctly as compensation income on your return...

[Individual131415]

@maglib  Oh, now I'm confused because after I filled in the information it asked for, my taxes did go up by the amount I expected. I went and took a screenshot of the stock income page on turbotax as is it currently, and replaced my actual numbers with fake numbers, to give you an idea of what I input.

In this fake example, $2000 would be the amount I received a check for, and $100 is the result of multiplying the number of total shares times the exercise price. (There was no commission.) 

The negative number, ~$1900, is something Turbotax calculated for me, I did not input that. Same with the gain/loss amount.

The brokerage is still untitled since I left it blank, but I can change that to the company's name like you mentioned. 

Here is the edited example:

Edited to include a second screenshot of the next page Turbotax takes me to:

Here, "name of company" is where it asked me to link these shares to one of my employers that I already entered a W-2 for. I chose NQSO for plan type, and W-2 disposition field was filled in by Turbotax, and it matches the total check amount I received. Then, I unchecked "reported on W-2" since it was not reported there.

After submitting all of this, my taxes went up by the expected amount. Did I do something incorrectly here?

[maglib]

I suggest you delete the stock transaction, start over... Make the cost basis the same as the proceeds, enter date the date you sold your shares for both....  You should have a $0 gain/loss on the stock sold.  Don't go into need more help.  Your company is the broker.  Explainatin will be Company stock options excercised and sold, no 1099.

your taxes will only increase when you input the Other income which will be the amount of the check. So you will be taxed on the FMV of the stock minus your cost to excercise as that is the value that should have been ordinary income. Your taxes should increase probably close to 20-30%% of the cash you received.

[Individual131415]

@maglib Okay, I think I understand what you're saying to do, then. However, I'm confused why you said to make the cost basis the same as the proceeds. When I click on "more information" in the cost basis section for this, it says, "The cost basis for NQSO is the actual price you paid per share times the number of shares."

It also gives this example:

"Here’s an example:

You bought 1,000 shares in Company, Inc for $10,000 at $10 per share. So the cost basis is $10,000. This year, the value rose to $15 per share and you sold.

sold amount - cost basis = taxable amount

$15,000 - $10,000 = $5,000"

So my question is - based on this, doesn't that mean my cost basis is NOT the same as the proceeds? It is the amount I "bought" the shares for, as it describes here?

Thank you for your patience with me trying to understand and learn, and sorry for any confusion.

Edit to add - The 20-30% tax increase you mentioned matches the increase I saw when I input all of this in this way.

[Individual131415]

@maglib 

Oh hey I think I might've figured this out! I think we might have both been saying the same thing after all. I think Turbotax might've gone ahead and done what you were saying automatically without me having to do so. In my overall summary at the end of my return before submitting, the summary says:

"Your total income of $60,000 comes from adding up your capital gain of $-1, your state and local taxable refunds of $0, your taxable interest of $400, and the $59,601 you earned at your jobs."

Note: I replaced all bolded numbers with fake numbers for privacy. But, I didn't change what it said for capital gains. It looks like it did end up being close to zero for the capital gain, and the total amount of stock income got added into my normal income. If that makes sense. That fake total of $59,601 is the total if you add up my normal W-2 income with the total stock income.

I'm still uncertain if this is right, and I greatly appreciate you replying so many times to help me figure this out. 

[maglib]

Looks right. I will be honest. I like doing it manually. The TT interview has often been problematic and more confusing and why I'd never have anyone go through all what is simpler to do manually.  As long as total wages includes it as income, you are good