I've entered a sale of ISOs from my 1099-B (Short Term - Box A checked) into TurboTax. After doing so, it prompts me to adjust my cost basis, but I don't understand why I'd need to do that. I've read through this TurboTax article on ISO taxation: https://turbotax.intuit.com/tax-tips/investments-and-taxes/non-quali[product key removed]ns/L8zsxRi7B
If I go through the steps to my adjust cost basis and enter details about the ISOs, it comes back with a significantly inflated cost basis. Should I just be skipping this step by selecting "I don't want to adjust (not recommended)"? In what scenario would one need to adjust their cost basis as it relates to ISOs?
Including additional context about the ISOs.
Date of Grant: 01/2018
Number of ISOs = 1000
Strike Price = $1.85
Date of Exercise: 12/2023
Sale Price = $20
Date of Sale: 10/2024
Yes, no adjustment needed. You have a qualifying disposition based on the dates. Your basis is the exercise price. Your gains are taxed as long term capital gain.
A nonqualifying disposition would include ordinary income.
Thank you. However, now I am a little confused. I was under the impression that in order for a sale to be a qualifying disposition, the following two things need to be true:
1) The shares were sold more than one year after the exercise date
2) The shares were sold more than two years after the grant date.
While 2 is true in my case, 1 is not. I exercised the ISOs 12/2023, and sold them ~10 months later 10/2024.
Wouldn't the above make this a nonqualifying disposition?
No, for an ISO it is the later of. The Tax Book states: Holding period requirement. The holding period requirement is satisfied if the taxpayer does not sell the stock until the end of the later of the 1-year period after the stock was transferred to the taxpayer or the 2-year period after the option was granted. The holding period begins on the day after the option is exercised.
I feel like I'm missing something super obvious here...In my case, the dates would be the following:
2 years after grant = 01/2020
1 year after exercise = 12/2024
The later of these two dates is 12/2024. I sold my ISOs prior to 12/2024 -- specifically, on 10/2024. Doesn't this make it a disqualifying disposition?