2002 Tax Help Archives  

Stocks (Options, Splits, Traders)

This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Do I report the buying of stock?

Ordinarily, you do not have to report the purchase of stock, only the sale of stock.

However, if you exercise a nonstatutory stock option, a type of stock option granted by an employer, you may have income to report in the year of exercise (the excess of the fair purchase value of the stock over the option price) if your rights in the stock are substantially vested at that time, see Publication 525 (PDF), Taxable and Nontaxable Income, for further information.

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How do I report incentive stock options on my tax return?

If your option is an incentive stock option, you do not include any amount in your gross income at the time the option is granted, or at the time you exercise it. However, you may have income for Alternative Minimum Tax in the year you exercise. If the special holding periods are met, any income or loss from the sale of the stock is treated as a capital gain or loss. However, if you do not meet the special holding period tests, you may have compensation income when you sell the stock. For further information, refer to Publication 525 (PDF), Taxable and Nontaxable Income and Form 6251 (PDF), Alternative Minimum Tax-Individuals.

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How do I report a nonstatutory stock option on my tax return?

If you are granted a nonstatutory stock option, the amount of income to include and the time to include it depend on whether the fair market value (FMV) of the option on the grant date can be readily determined. For Specific information and reporting requirements, refer to Publication 525 (PDF), Taxable and Nontaxable Income.

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I received an incentive stock option from my company, is this taxable?

If your option is a qualified incentive stock option, you do not include any amount in your gross income at the time the option is granted, or at the time you exercise it. However, you may have income for Alternative Minimum Tax in the year you exercise. If the special holding periods are met, income or loss from the sale of the stock is treated as a capital gain or loss. However, if you do not meet the special holding period tests, you may have compensation income. For further information, refer to Publication 525 (PDF), Taxable and Nontaxable Income

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I purchased stock from my employer under an employee stock purchase plan. Now I have received a From 1099-B from selling it. How do I report this?

If the special holding periods are met, generally treat gain or loss from the sale of the stock as capital gain or loss. However, you may have compensation income if:

  • The option price of the stock was below the stock's fair market value at the time the option was granted, or
  • You did not meet the holding period requirement, explained next.

You must hold the stock for more than 2 years from the time the stock option is granted to you and for more than 1 year from when the stock was transferred to you. If you meet the holding period requirement and the option price was below the fair market value of the stock at the time the option was granted, you report the difference as compensation income (wages) when you sell the stock. Generally, this compensation income cannot be more than your gain on the sale. If your gain is more than the amount you report as compensation income, the remainder is a capital gain reported on Form 1040, Schedule D (PDF). If you sell the stock for less than the amount you paid for it, your loss is a capital loss.

For more information, refer to Publication 525 (PDF), Taxable and Nontaxable Income, and Publication 551 (PDF), Basis of Assets.

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Where on the tax return do I enter the compensation income I had from the sale of stock that I purchased under my employer's stock purchase program?

The compensation income is reported on line 7 (wages, salaries, tips, etc.) of Form 1040. It is added to the stock's basis used when determining capital gain or loss on the sale of the stock. Any capital gain or loss on the stock sale is reported on Form 1040, Schedule D (PDF), Capital Gains and Losses.

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Is the Internal Revenue Code limit of $25,000 per calendar year for stock bought through an employee stock purchase program (ESPP) based on the discounted purchase price or the higher stock value?

Under the terms of an employee stock purchase plan, you cannot accrue the right to purchase more than $25,000 of stock, valued at market value on the day the option is granted, in any one calendar year. The limit is not based on the purchase price.

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Are incentive stock options subject to alternative minimum tax, and if so, how do I determine the basis for the stock?

A taxpayer generally must include in alternative minimum taxable income the amount by which the price he paid for stock received pursuant to the exercise of an incentive stock option is exceeded by the stock's fair market value at the time his rights to the stock are freely transferable or are not subject to a substantial risk of forfeiture.

Increase your alternative minimum tax basis by the amount of the adjustment. Your basis for regular tax is not affected by the adjustment.

If a taxpayer acquires stock pursuant to the exercise of an ISO and disposes of the stock in a disqualifying disposition in the same taxable year, the transaction is subject to regular tax, and the alternative minimum tax does not apply. Refer to Internal Revenue Code 83, Internal Revenue Code 56(b)(3), and Internal Revenue Code 422(c)(2). For more information, refer to Instructions for Form 6251, Alternative Minimum Tax- Individuals.

References:

  • Instructions for Form 6251, Alternative Minimum Tax- Individuals
  • Internal Revenue Code 83
  • Internal Revenue Code 56(b)(3)
  • Internal Revenue Code 422(c)(2)

I purchased stock through an employee stock purchase plan at my work which split three months later. Three months after that, I sold the stock at a gain. How does the split affect how I report the stock sale on my tax return?

With either of the two types of statutory employee stock option plans, there is no income as a result of the granting of the option or the exercising of the option (purchasing stock). These two types of plans are the employee stock purchase plan and the incentive stock option plan. However, if you don't hold the stock long enough to meet the holding period requirements, when the stock is sold you may have to report compensation income (wages). The split will affect the computation of capital gain and compensation income, if any.

For the stock purchased under an employee stock purchase plan to receive favorable tax treatment, it must be held for at least two years after the option is granted and at least one year after the option is exercised. If the holding periods are not met, the lesser of the fair market value of the stock on the grant date minus the option price or the fair market value on the sale date minus the amount you paid for the stock is compensation income (wages). To the extent that the gain is being taxed as wages on your return, it becomes part of your adjusted basis in the stock sold. When determining basis, the amount you paid for the stock is divided equally among the shares received in the split.

For information on incentive stock option plans and nonstatutory stock options, or more information on employee stock purchase plans, refer to Publication 525 (PDF), Taxable and Nontaxable Income

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