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Subject:   Disqualifying ISO Tax Q
Date:   Wed, 09 Feb 2000
From:   Mark

Michael,

I have a question in regards to how to properly report a disqualifying ISO disposition that took place last year. On Dec. 12, 1999, I exercised X00 ISO and immediately sold the shares. The strike price was $XX.00/share. They were sold for $XXX.X0/share. The FMV of the stock on 12/16/99 was $XX0.00/share. My employer has reported $XX,000 ordinary income as a result of this disposition. However, I only received $XX,XX0. Do I record the $X.X0 share difference as a short term captial loss on schedule D?

Mark

Answer

Hello Mark,

You should ask your employer to issue a corrected W-2.

The ordinary income for the early exercise of an incentive stock option is the lesser of the excess of the fair market value at exercise or the gain on sale. (Section 422(c)(2).)

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.