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How do I determine the cost (tax basis) when reporting sales of option stock?

July 16, 2001

Subject:   Employer's tax withholding upon exercising options
Date:   26 Jan 2001
From:   Debra

When I exercised my options, I did so at various prices and times, as the options vested... Each time, my employer deducted taxes based upon fair market value. Fortunately, I sold these shares before the stocks' value plummeted, but... I did so within the first year I'd exercised these options.

My questions are multiple:

  1. - When I note 'cost' in my Turbotax program, should I include the tax already paid? If not, where/how do I indicate the taxes already paid?

  2. - How do I calculate the costs, when the options were exercised at different groupings vs. the stock shares sold? In other words, I exercised options in increments of 100 (gift from employer), 63, 62 and 625. However, I sold in blocks of 150, 150, 100, etc. I could take the amounts of cost and divide by respective number of shares. This is VERY complicated.

  3. - Will my former employer be providing me with copies of the options and withholding, or do I need to request this?

  4. - Can you direct me to any resources to clarify these issues?

THANK YOU SO MUCH. I know there are pros who can help with taxes, but I want to be as educated and not totally dependent upon the pros.

Best regards,

Debra

Answer

Date:   09 Feb 2001

Hello Debra,

  1. Your cost does not include the tax you paid. The withholding, if any should be included on Form W-2 that you receive from your employer. You do add the ordinary income included on Form W-2 for the early sale of your options in your cost when reporting the sale of the stock.

  2. Unless you designated which shares you were selling, the shares are considered to be sold on a first-in, first-out basis. In other words, start with the shares you bought first and then work your way up chronologically. Yes, this is very complicated. Maybe you should get some help.

  3. First, you should have notified your employer about the early dispositions of stock, including which blocks were sold, the dates of sale and the amounts the shares were sold for. Then your company’s stock administration department should generate the reports necessary to adjust your W-2 and for you to use when preparing your income tax returns.

  4. There are some books around about employee stock options that may help.

I will warn you again that many people have trouble reporting stock acquired with employee stock options using Turbo Tax.

I highly recommend that you find a professional tax preparer and let that person do what he or she is trained to do.

Do you make your own shoes and do your own dental repair? Use a little common sense.

Good luck!

Mike Gray

For more answers to our readers' questions and to learn about new tax developments relating to employee stock options, subscribe to our newsletter, Michael Gray, CPA's Option Alert!

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

 

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