W2 Box 12 Code V with Form 2555

[Anonymous]

Hello,

I prepare my tax return 2021 with TurboTax, I meet some confused problems.

I am tax residence of USA, but I always work and live abroad in whole 2021 year, I receive some options related abroad work.
My only income came from exercised options income (non-statutory stock option) during 2021, it means all of W2 amount are exercised options value.

I import W2 into TurboTax, these options FMV value display on the W2 box 1 & box 12 with code V.
I also claim Form 2555, the TurboTax calculate and exclusion ~$100,000 depends on exact days outside of U.S.

My confused is, does these income eligible to exclusion with Form 2555?

Because I found some answer that options income will report on Schedule D (TurboTax community link ), sounds Form 2555 does not work with Schedule D income.

Moreover, I exercised options and sold them couples week late, it made capital loss totally ~30% of W2 amount in final, does it also deductible from W2 exercised options income?

Thanks.

[RobertB4444]

The foreign earned income exclusion does not apply to investments within the US.  So your stock sales, if reported on schedule D, would not be exempt from tax due to your living abroad.

If you had an overall loss from the sale of stock you will be able to take $3,000 of that loss against any income that you have for the year that exceeds the foreign earned income exclusion.

[Anonymous]

Thank your reply.

This is reason that I confused.

Please allow me explain a little more.
1. My options grant depends on perform service at foreign.
2. My options exercised and sold at HongKong stock market (non U.S. stock market)
3. The employer (Foreign Company U.S. Branch) reported these exercised amount on U.S. W-2 (box 12 code V), and HongKong brokager will report U.S. 1099-B either (unavailable now).
4. I generate capital loss during sold exercised options.

Totally above, I don't know how to fill these information through TurboTax.
I confused that the options value will report as investment income (Schedule D?) or W-2 compensation income (Form 2555 eligible?).

At least, TurboTax generate excludsion (Form 2555) for my tax return now, but I am not sure it is right or not..

[LeonardS]

Only earned income is eligible for exclusion under the Foreign Earned Income Exclusion.  Unearned, or inactive, income like pension payouts, interest, capital gains and dividends cannot be included.

[Anonymous]

Thank you for point out these IRS rule.

Does exercise option make earned income?

I still confused, it looks not capital gains because 'income' amount generate when exercised options.

I guess I sold options will be treated as capital loss, but not sure how about W-2 amount that related exercise options.

[SusanY1]

There are two components to stock options that are reported as "Code V" on your W2.  One part is compensation - that's the "Code V".  The amount listed in Box 12 is also a part of what makes up your Box 1 total wages.  That income is excludable as foreign earned income, subject to your meeting all of the terms and conditions to exclude that income on Form 2555. 

The exercise of the stock options is ordinary income - and you don't need to do anything extra here other than enter your W-2 as issued, and answer the questions in the Foreign Earned Income and Exclusion section of TurboTax.

The subsequent sale of the underlying stock on the Hong Kong exchange is a capital gain (or loss) that requires a separate entry into TurboTax.   You won't have the traditional 1099-B, but you can still enter the data that will allow you to calculate the gain (or loss) in the Investment Income section of the program.  In this section you will answer yes to the question "Did you sell any investments in 2021" and then no to the question "Did you get a 1099-B or a brokerage statement for these sales"?  

Here you can enter from your own records or your Hong Kong statement the information about the sale of the underlying stock on the exchange for a loss. 
Keep in mind that the Box 12, Code V amount is part of your basis in that stock.  

[Anonymous]

Thank you a lot.

Since all of amount on my W-2 related exercised options, the Box 1 equal to Box 12 Code V.

So looks TurboTax calculate with Form 2555 exclusion is correct.

I will post final result after my tax return acceptance by IRS.