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Subject:   Question on ISO
Date:   1 Feb 2009
From:   Rajesh

Hello Mr. Michael Gray,

I made a same day sale during 2008 of shares received when I exercised an incentive stock option granted in 2001. The income was reported on Form W-2 by my employer.

1. Can this be treated as capital gain, eligible for reduction by my capital losses?



2. I didn't make estimated tax payments for the tax relating to the exercise and sale of the stock. Will there be a penalty?

Please let me know,
Thanks,
Rajesh

Answer

Date:   1 Feb 2009

Hello Rajesh,

I suggest that you read my report, "Executive Tax Planning For Incentive Stock Options" (see above), or get a copy of our book, Employee Stock Options - Executive Tax Planning.

1. No. The income is taxable as wages, not capital gains. That's why it's reported on Form W-2. Remember to increase the tax basis of your stock on Schedule D for the related wages when your report the sale of any shares reported on Form 1099B.



2. Assuming your 2007 adjusted gross income was more than $150,000, as long as you paid at least 110% of your 2007 income taxes through withholding, there won't be a penalty for underpayment of estimated tax. Otherwise, a penalty could apply. It's like interest, not a serious penalty.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

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.