How do I avoid getting doubled taxed on an ISO when that added $15k as income to my W2 when I enter my 1099B? No taxes withheld & paid $3k out of pocket for the shares.

[TomYoung]

You eliminate the "double tax" issue by using the correct basis when you report the sale.  The correct basis is not the out of pocket cost you paid to acquire the stock you sold.  The "spread" between the cost of exercise and the lower of the fair market value at exercise of the selling price gets added to your out of pocket cost.  Assuming you sold at a per share price higher than the per share "fair market value" at exercise, that per share "fair market value" is your per share cost basis.

Enter the sale exactly as it reads, wrong basis and all.  Then click on the "I'll enter additional info on my own" blue button.  On the next page enter the correct basis in the "Corrected cost basis" box.  The correct basis is (number of shares sold) x (correct per share basis, which includes the compensation per share)

TurboTax will report the sale on Form 8949 "as reported by the broker" but will put an adjustment figure into column (g) of the Form, a code "B" into column (f) of the Form, and the correct amount of gain or loss which includes the adjustment.

Tom Young

[laxman1100]

Thank you, in this case, the 1099 entry will show up as negative since the cost basis was not reported as part of the income?

[TomYoung]

You enter the correct cost basis as described above and as a positive number.  TurboTax will then subtract the correct basis from the proceeds to come to the reportable gain or loss.  On Form 8949 the amount of your adjustment will show up as a negative number.

[laxman1100]

Thanks again for the response!  I have $15k added as income to my W2.  I paid $3k for the options.  The way I see it in my 1099 entry is for -$3k after I adjusted the cost basis to account for the income.  In my mind, that makes sense since I'm taxed on $15k, but took a "loss" for what I paid for the income.  But what I think and the IRS thinks could be two totally different things!

[TomYoung]

The sum of $15K + $3K = $18K and that's the basis of the GROSS number of shares in the grant.  IF the sale you are working on ISN'T for ALL the shares in the grant THEN you must think in terms of "per share" basis and use the per share basis number times of shares sold as the correct basis to use.  Did you sell the same number of shares as the GROSS amount of shares in the grant?

 "The way I see it in my 1099 entry is for -$3k after I adjusted the cost basis to account for the income.  In my mind, that makes sense since I'm taxed on $15k, but took a "loss" for what I paid for the income."

That doesn't make sense, and I don't even know how many shares you sold.  You have a gain in your per share selling price is higher than the per share basis and you have a loss if your per share selling price is lower than your cost basis per share.  

[laxman1100]

Hi, thanks again for responding.  Yes, all shares were sold at the time, so not sure if the per share basis matters?  In the most basic sense, if the 1099 isn't negative (income recognized on my W2), doesn't that double tax on the ($15k) W2 income as well as the (positive) income on the 1099?  

[TomYoung]

"if the 1099 isn't negative (income recognized on my W2), doesn't that double tax on the ($15k) W2 income as well as the (positive) income on the 1099? "

You have to understand that the sale of the stock is a completely separate, a completely independent transaction, except that the compensation helps set the basis.  Having set the basis you're going to have a gain if the selling price is higher than the basis and you're going to have a loss is the selling price is lower.  And that's all there is to it.  The "double tax" issue is COMPLETELY ELIMINATED if you use the CORRECT BASIS.  

So you said you spent $3K to exercise and the exercise created $15K of compensation, so the total basis for that GROSS number of shares in the grant - we'll call that "X" -  is $18K.  So your per share basis is $18K/X.  What is that number?  What was the per share selling price?

[laxman1100]

Thanks, maybe real numbers will be more useful as well background.  Again, THANK YOU for this help.  I had 3250 options with a strike price of $.92 and a FMV of $1.08.  I cut a check for $2990 to buy all options; 2 months later, the company was sold and I was paid out $15,088.  The $15088 is listed on my W2 as ESPP in box 14.  I hope that helps.

[TomYoung]

Are we talking ISO or ESPP here?  Two entirely different animals.

Based on what you stated as to strike price vs. FMV I'd say you bought the stock through an ESPP that offered a 15% discount.

But now the $15,088 on the W-2 doesn't make sense.  

Clearly this would be a disqualifying disposition and a disqualifying disposition results in "compensation" that's the "spread" between the strike price and the FMV.  ($1.08 - $92) x 3,250 = $520.  So I'd say that the W-2 should show $520, your basis for calculating gain or loss is ($2,990 + $520) = $3,510, and your capital gain is the proceeds of $15,088 (I assume that's (3,250 x $4.64246) with that $4.64246 being the negotiated selling price) MINUS $3,510 = $11,578.

I'd say you have $520 of compensation and $11,578 of short term capital gain for a total income, (all taxable at ordinary income rates) of $12,098.  I have no idea what the W-2 income would be stated at the same amount as the proceeds - that is the proceeds from your sale, right?.  

But I guess if you report $15,088 of W-2 income, and then add that $15,088 to your $2,990 for the basis and then subtract that basis from $15,088 of proceeds for a loss of $2,990 you come back to the same $12,098.  I don't understand it, it might in the short term work against you, (if you have other net capital losses you could be in the position of not being able to deduct them all this year), but it is the same amount of income.

[laxman1100]

Thanks, I agree that it's weird they put the gross proceeds on the W2, which is why I was trying to figure out how best to get the 1099-B to true up the actual taxable amount.  With the limit of $3k (married filing jointly) I have a small amount loss over the limit, but that gets carried over to next year.  Do you think (your opinion) this method causes a red flag for audit?

[TomYoung]

I really have no opinion there.  The basis "track" from what's reported on the W-2 so I'd think not.  But overall it doesn't seem like there's a misstatement of taxable income, and that's what's really important.

[laxman1100]

Thank you very much, this has been very helpful!  Love the Turbo Tax community.

[chastity_lashure]

Very helpful.