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 market purchase value of the stock less the exercise price) if your rights in the stock are substantially vested at the time of exercise, see Publication 525, Taxable and Nontaxable Income, for further information.

References:

• Publication 550, Investment Income and Expenses
• Publication 525, Taxable and Nontaxable Income
• Tax Topic 409, Capital gains and losses

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 the option. If the special holding periods requirements 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 requirements, you may have compensation income when you sell the stock. For further information, refer to Publication 525, Taxable and Nontaxable Income and Form 6251 (PDF), Alternative Minimum Tax-Individuals.

References:

• Publication 525, Taxable and Nontaxable Income
• Form 6251 (PDF), Alternative Minimum Tax-Individuals

Generally, if you have a nonstatutory option, you do not include any amount in income on the date of grant. (or otherwise dispose of) the nonstatutory option in an amount equal to the FMV of the stock less the exercise price. However, if you have nonstatutory option with a readily ascertainable FMV, different rules apply. See Publication 525, Taxable and Nontaxable Income.

References:

• Publication 525, Taxable and Nontaxable Income

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 the option. If the special holding period requirements 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 requirements, you may have compensation income. For further information, refer to Publication 525, Taxable and Nontaxable Income

References:

• Publication 525, Taxable and Nontaxable Income
• Alternative Minimum Tax

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:

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, and you do not have any ordinary income.

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

References:

• Publication 525, Taxable and Nontaxable Income
• Publication 551, Basis of Assets
• Form 1040, Schedule D (PDF), Capital Gains and Losses

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.

References:

• Publication 525, Taxable and Nontaxable Income
• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

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

References:

• Internal Revenue Code section 423 (b)(8)

A taxpayer generally must include in alternative minimum taxable income the amount by which the price 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 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 incentive stock option 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)

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 stock is granted and at least one year after the stock is transferred to you. 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, Taxable and Nontaxable Income

References:

• Publication 525, Taxable and Nontaxable Income
• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital gains and losses