Print This Page

Subject:   nqso question
Date:   7 Apr 2008
From:   Gini

Hi Mike,

I exercised NQSOs for 1,000 shares of company stock for $5.00 per share when the fair market value was $12.00 per share. Taxes were paid for $7,000 of income. After a few months, the shares were sold for $16.00 per share.

Do we pay taxes on $11,000 (($16 – 5) X 1,000) or $4,000 (($16 – 12) X 1,000)?

What forms should be used to report the sale?

Regards,
Gini

Answer

Date:   6 May 2008

Hello Gini,

There is a lot of information about this at our site and in the article on Executive Tax and Financial Planning For Non-Qualified Stock Options.

The $7,000 of ordinary income for the exercise of the NQOs should have already been included on your Form W-2.

That $7,000 is added to the $5,000 paid for the stock to compute a tax basis (cost for gain and loss reporting) of $12,000. The sale of the stock should be reported on Schedule D for a $4,000 short-term capital gain.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified 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.