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Subject:   how to write a 1040 after same day sales of ISO's
Date:   Thu, 03 Feb 2005
From:   Rick

I exercised and sold ISO shares on the same day this year [presumably 2004]. My company didn't report the income on my W-2 form. Will I get a W-2 from Merrill Lynch (which administers the plan)?

Also, as I understand it, I need to report both a gain and loss of the same amount on Schedule D and report the net gain from the sale as W-2 income. What happens if Merrill Lynch doesn't send the W-2?

Maybe I'm wrong and the options are non-qualified?

Thanks Mike!
Rick

Answer

Date:   Wed, 09 Feb 2005

Hello Rick,

Income from exercising non-qualified options should also be reported on Form W-2.

Talk to the people in your employer's payroll department. They may be issuing a corrected Form W-2 to include the ISO income. If they don't report the income on Form W-2, you can either adjust your wages with a disclosure worksheet or report the ISO income as "Other Income" at line 21, Form 1040.

If the brokerage firm reports the sale of stock on Form 1099-B, the sale price should be reported on Schedule D. The cost of the stock is the option price plus the ordinary income reported for the disqualified disposition of the ISO stock. It sounds like the sale date and acquisition date are the same day.

Merrill Lynch is not your employer and probably will not issue a W-2 form for this transaction.

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.