How should I compute the basis of stock in ISO sales following exercise?
March 21, 1999
Subject: Basis after AMT from ISO
Date: Fri, 12 Mar 1999
I just found your website and it has answered many questions about ISO’s and AMT. However I have one more question about the basis of stock in ISO sales following an ISO exercise, about which I am still very confused (as are a number of accountants I have questioned!)
For example, let’s assume I exercised 10000 shares of a qualified ISO with an option price of $1 in 1997, and the value when exercised was $11. Assuming none of these shares were sold in 1997, I have a tax preference of 100,000 added to my 6521. Let’s assume that added an AMT tax amount of $28,000 to my regular tax for 1997. Similarly, assume that I exercised the same number of shares in 1998, for an additional tax preference of 100,000 to AMT in 1998 for the same extra AMT tax amount. The 8801 for 1998 would show an AMT Tax Credit.
In 1999, I decide to sell all of the shares I exercised in 1997. Is my basis reported on Schedule D always the $1 option price, as I understand it, or $11, the value when the ISO shares were exercised.
If it is the former, then I must pay capital gains again (depending on the selling price) and use AMT credits over a number of years to recoup the AMT taxes already paid. Or is there a way to completely offset the capital gains in the year I sell, up to the limit of my total minimum tax credit carry forward from the prior year (line 26 of 8801). That is, can I use as much of my tax credit carry forward as needed to fully offset the capital gains in the year I sell. Playing with turbo tax, it looks as if I can only use a small part of the total carry forward in any one year, depending on my taxable income, etc., for a given year. In effect, I get taxed twice, and can only recover the AMT over a period of years, the amount in each year depending on my taxable income and subsequent AMT.
Or is the latter case, that the basis on the Schedule D is now $11, not $1. Any gains or losses are computed against the $11 basis. In the event of a capital loss, I could only write of $3,000 per year against any capital gain I might have.
Los Alamitos, CA
Date: Sun, 21 Mar 1999
If you haven’t done so already, please request a copy of our report, Incentive Stock Options – Executive Tax and Financial Planning Strategies.
I don’t know if TurboTax does a good job of handling the ultimate sale of stock received by exercising an ISO. It is designed to prepare “conventional” income tax returns. (Note – Turbo Tax has since fixed its program for federal reporting of dispositions. Watch state reporting.)
In summary, the tax basis on Schedule D for the regular tax is the option price of $1 per share.
In computing the gain on sale for the alternative minimum tax, the tax basis of the shares is the fair market value at exercise, $11 per share in your example. This will be shown as a negative basis adjustment on line 9 of Form 6251, and a reduced amount eligible for the 20% maximum capital gains rate in Part IV of Form 6251.
As a result, the tentative AMT will be less than the regular tax in the year of sale. The minimum tax credit may be used up to the excess of the regular tax over the tentative AMT. There may be some excess AMT credit to be used in future years.
The higher basis for AMT could result in a capital loss for AMT purposes. The IRS position is a net AMT capital loss is limited to $3,000, with the excess eligible to carry forward for use in a current year.
Don’t you think it might be worthwhile getting some professional help if your options represent a significant investment for you?
I hope this helps.