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Date:   Fri, 15 Jan 1999
From:   Carrie

I exercised stock options (ISOs within the meaning of section 422(b)) during 1998. I just found out from my former company that the difference between the exercise price and the FMV on the date of exercise (same day sale) will be reported on my W-2 as regular income. Originally I thought the difference would be subject to capital gains rates, not ordinary income. Is this correct? Would there be any AMT tax affect for this transaction?

I also exercised options in 1998 (from the same plan) which I still currently own. Am I correct in thinking that I do not have to recognize any income in 1998 for the difference between the exercise price and FMV on date of exercise? When I sell these shares do I then recognize the difference between the exercise price and FMV on date of exercise as ordinary income (will the issuing company issue a 1099?) and any subsequent appreciation as capital gain income?

Thank you,
Carrie

Answer

Hello Carrie,

When you sell shares acquired using an incentive stock option before meeting the holding period requirements, the spread at exercise is taxable as ordinary income and is reported on your W-2 form. Since you made a same-day sale, your employer is reporting the transaction correctly.

There is no alternative minimum tax adjustment when the stock is sold in the same year the option is exercised.

You will not report income for the shares you still have for 1998, but you will report an AMT preference. If you meet the holding period requirements, all of the gain will be long-term capital gain when the stock is sold, with an offsetting AMT basis adjustment and possible AMT credit offset.

For more details, request a copy of our free report, Incentive Stock Options – Executive Tax and Financial Planning Strategies.

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.