Simplified Tax CPE about Employer Stock Options
A confusing matter for many taxpayers involves the sale of assets for a taxable gain. Tax preparer jobs of calculating capital gain or loss are complicated when cost basis is uncertain. A particularly confusing situation for determining cost basis is securities acquired from exercise of employer stock options.
Selling stock that was purchased from exercising stock options usually results in a capital gain or loss. The problem is determining the cost basis to subtract from sale proceeds to determine the gain. In many cases, the actual purchase price is less than the basis.
Someone who has become a tax preparer helps individuals accurately account for previously taxed amounts added to the basis of shares accumulated from stock options. The first component of this accounting is distinguishing between regular non-qualified options and incentive stock options.
Tax practitioners learn in their study for either the tax preparer exam or the enrolled agent test that simply exercising stock options can create taxable income. Upon exercise of non-qualified stock options an amount is added to taxable compensation in the exercise year on the employee's W-2.
The amount added is the difference between the stock's market value at exercise and the cost to exercise the purchase option. This amount added to taxable compensation upon exercise is also an addition to basis of the shares. That prevents the compensation amount from being taxed again when the shares are sold. Stock sold upon option exercise causes treatment of the entire gain as compensation income.
The situation is different for incentive stock options if none of the shares are sold upon exercise. However, the shares are treated just like those acquired with regular non-qualified options if they are sold within either one year of the exercise date or two years of the option grant. An individual who fails to meet both conditions has added compensation reported on a W-2 of the difference between the stock's market value at exercise and the cost to exercise the purchase option. This addition to compensation occurs in the year stock is sold.
The basic tax CPE covering stock acquired by exercising options therefore focuses upon the type of option. Incentive stock options are likely to have a greater amount taxed as a capital gain than regular non-qualified options. An individual must meet the holding period requirements in order to avoid tax on compensation income with exercise of incentive stock options.
Another issue addressed in tax class about exercising incentive stock options is the effect on alternative minimum tax. An addition to the calculation under alternative minimum tax occurs even when shares are unsold after exercise. The income addition is the difference between the stock's market value at exercise and the cost to exercise the purchase option. This causes the share basis under the alternative minimum tax to differ from basis under the regular tax system.
With so many variables to consider for tax calculations on stock options, professionals must carefully consider each detail. Preparation for this procedure begins with solid training in tax courses.
Selling stock that was purchased from exercising stock options usually results in a capital gain or loss. The problem is determining the cost basis to subtract from sale proceeds to determine the gain. In many cases, the actual purchase price is less than the basis.
Someone who has become a tax preparer helps individuals accurately account for previously taxed amounts added to the basis of shares accumulated from stock options. The first component of this accounting is distinguishing between regular non-qualified options and incentive stock options.
Tax practitioners learn in their study for either the tax preparer exam or the enrolled agent test that simply exercising stock options can create taxable income. Upon exercise of non-qualified stock options an amount is added to taxable compensation in the exercise year on the employee's W-2.
The amount added is the difference between the stock's market value at exercise and the cost to exercise the purchase option. This amount added to taxable compensation upon exercise is also an addition to basis of the shares. That prevents the compensation amount from being taxed again when the shares are sold. Stock sold upon option exercise causes treatment of the entire gain as compensation income.
The situation is different for incentive stock options if none of the shares are sold upon exercise. However, the shares are treated just like those acquired with regular non-qualified options if they are sold within either one year of the exercise date or two years of the option grant. An individual who fails to meet both conditions has added compensation reported on a W-2 of the difference between the stock's market value at exercise and the cost to exercise the purchase option. This addition to compensation occurs in the year stock is sold.
The basic tax CPE covering stock acquired by exercising options therefore focuses upon the type of option. Incentive stock options are likely to have a greater amount taxed as a capital gain than regular non-qualified options. An individual must meet the holding period requirements in order to avoid tax on compensation income with exercise of incentive stock options.
Another issue addressed in tax class about exercising incentive stock options is the effect on alternative minimum tax. An addition to the calculation under alternative minimum tax occurs even when shares are unsold after exercise. The income addition is the difference between the stock's market value at exercise and the cost to exercise the purchase option. This causes the share basis under the alternative minimum tax to differ from basis under the regular tax system.
With so many variables to consider for tax calculations on stock options, professionals must carefully consider each detail. Preparation for this procedure begins with solid training in tax courses.
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