Do I have to pay tax on the price of my options?
March 23, 2005
Subject: nqso
Date: Mon, 28 Feb 2005
From: Wendy
Hello Mike,
Thanks for a very informative site. My question is in regards to NQSOs.
My husband exercised 5,000 options at the end of 2004. I know we have to pay tax on the difference between the value of the options when he was issued them and the value of the stock at the time of exercise and sale, but does he also have to pay taxes on the value of the options at issue at the same time? To explain it better:
| 2004 stock value at the time of exercise and sale @ $52 per share, | 520,000 |
| 2001 stock option grant of 10,000 shares at $22 per share, | 220,000 |
Taxable gain is $300,000. Do we also have to include the $220,000 as ordinary income?
My accountant says yes, but my husband’s panicked colleagues are saying that’s impossible.
Thanks,
Wendy
Answer
Hello Wendy,
If I’m understanding you correctly, here’s how this works. I’m assuming you didn’t come up with any cash to exercise the options. The exercise price was paid from the proceeds of the sale. That means you received $520,000 – $220,000 less any taxes withheld.
The ordinary income that should have been included in your husband’s W-2 wages is $300,000. The tax basis of the shares sold to be reported on Schedule D (assuming you received a 1099-B for the sale) is $220,000 (option price) + $300,000 (additional wages) = $520,000. The only way the $220,000 option price would be taxable is if the employer gave you the money to exercise the option.
Good luck!
Mike Gray