How do I properly report a disqualifying disposition?

March 8, 2000

Subject:   Disqualifying ISO Tax Q
Date:   Wed, 09 Feb 2000
From:   Mark


I have a question in regards to how to properly report a disqualifying ISO disposition that took place last year. On Dec. 12, 1999, I exercised X00 ISO and immediately sold the shares. The strike price was $XX.00/share. They were sold for $XXX.X0/share. The FMV of the stock on 12/16/99 was $XX0.00/share. My employer has reported $XX,000 ordinary income as a result of this disposition. However, I only received $XX,XX0. Do I record the $X.X0 share difference as a short term captial loss on schedule D?



Hello Mark,

You should ask your employer to issue a corrected W-2.

The ordinary income for the early exercise of an incentive stock option is the lesser of the excess of the fair market value at exercise or the gain on sale. (Section 422(c)(2).)

Good luck!

Mike Gray

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

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