Subject:   Question on ISO
Date:   1 Feb 2009
From:   Rajesh

Hello Mr. Michael Gray,

I made a same day sale during 2008 of shares received when I exercised an incentive stock option granted in 2001. The income was reported on Form W-2 by my employer.

1. Can this be treated as capital gain, eligible for reduction by my capital losses?
2. I didn’t make estimated tax payments for the tax relating to the exercise and sale of the stock. Will there be a penalty?

Please let me know,
Thanks,
Rajesh

Answer

Date:   1 Feb 2009

Hello Rajesh,

I suggest that you read my report, “Executive Tax Planning For Incentive Stock Options” (see above), or get a copy of our book, Employee Stock Options – Executive Tax Planning.

1. No. The income is taxable as wages, not capital gains. That’s why it’s reported on Form W-2. Remember to increase the tax basis of your stock on Schedule D for the related wages when your report the sale of any shares reported on Form 1099B.
2. Assuming your 2007 adjusted gross income was more than $150,000, as long as you paid at least 110% of your 2007 income taxes through withholding, there won’t be a penalty for underpayment of estimated tax. Otherwise, a penalty could apply. It’s like interest, not a serious penalty.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options – Executive Tax and Financial Planning Strategies.