Employee Stock Options

[Terry D EA]

This is an area that I have rarely been involved in. Taxpayer exercised employee stock options and received a form from Morgan Stanley that does detail the transaction. No form 1099B will be received and the form shows a net amount of 20K. The gross amount is reported as well as the exercise cost. The gross amount plus Fed wh, Soc & med tax and State tax is shown as well. These amounts are also including in the amounts on the W-2 form. Here is where I am confused. The instructions on the form from Morgan Stanley tell you to put this transaction as a loss on SchD part I and to use the gross proceeds as the cost and the exercise cost as the sales price which will indeed return a loss on the exercise transaction. Is this correct? Here are the figures if it helps Gross proceeds 44k, exercise cost 20k. The 20k is after the associated costs and withholding taxes. I am confused as to why this is a loss and not a gain? Also, is form 6251 required to report the exercise option? Again, I appreciate any guidance anyone can give me with this.

[Lion EA]

Cost basis is what he paid, either out of pocket or withheld by MS, plus what he paid tax on via his W-2.  In a same day sale, if 44k was his proceeds, then his basis was probably 44k plus fees for a small loss.

[BulldogTom]

What Lion said.  When there is a same day transaction, the gain is put on the W2.  You end up with a loss equal to the broker fees.

 

Tom

Newark, CA

[easytax]

This is an area that I have rarely been involved in. Taxpayer exercised employee stock options and received a form from Morgan Stanley that does detail the transaction. No form 1099B will be received and the form shows a net amount of 20K. The gross amount is reported as well as the exercise cost. The gross amount plus Fed wh, Soc & med tax and State tax is shown as well. These amounts are also including in the amounts on the W-2 form. Here is where I am confused. The instructions on the form from Morgan Stanley tell you to put this transaction as a loss on SchD part I and to use the gross proceeds as the cost and the exercise cost as the sales price which will indeed return a loss on the exercise transaction. Is this correct? Here are the figures if it helps Gross proceeds 44k, exercise cost 20k. The 20k is after the associated costs and withholding taxes. I am confused as to why this is a loss and not a gain? Also, is form 6251 required to report the exercise option? Again, I appreciate any guidance anyone can give me with this.

Lion is correct   and since Tom beat me in replying he is too      STILL A BUT    as there is a big difference between 44K and 20K --- (if they paid 22K in fees for this, we may be in the wrong business).

 

 __ BUT -- in this case the numbers do not add up ---If your client exercised for 20K (price he paid) and the stock price when he received the option was 19K, then client has a 1K profit (less exercise fees and other costs) --- now --- even if he sold the stocks the same day --- his basis would be 20K less what he sold for (plus fees, etc.).

 

NOW  -- if the stock price was 20K less than the price he paid -- well yes, client has a loss ---/// I would be curious why you would exercise a loser at all?

 Morgan Stanley should issue a 1099-B too for any transaction.

Edited February 13, 2015 by easytax

[Lion EA]

OP needs to add the amount already reported on the W-2 for box 1 plus the 20k MS reported and hopefully get a total around 44k for the MS statement to make sense that there's a small loss.

[joanmcq]

Are they ISOs or NQSOs?

[Terry D EA]

In replying to the posts, I am not in my office at the moment to see the documents in order to answer Joan's question. I am still confused with the responses. The transaction has been reported on his W-2 form with code "V" in box 12. The withholding amounts are included in the Federal and State withholdings also reported on the W-2. MS specifically stated that he would not receive a 1099B form. I just need to know if there is any special reporting other than what has already been reported on his W-2. The W-2 does reflect the gain. My main confusion is with how MS's instructions were telling you to report the loss by using the proceeds as cost and the costs as the selling price.

[Pacun]

When you said that this amount is reported on the W2, are you talking on box 1 or on box 12 with a W code?

 

I have the same situation and what I have a is document that reads that he bought and sold on the same and his basis was 12K and he sold it for 20K. So in this case, the guy had a gain but there also something on his W-2.

 

Based on what you are saying, these transactions never result on a gain, correct?

[Lion EA]

Add the W-2 Code V amount to his cost.

Edited February 13, 2015 by Lion EA

[Pacun]

That means that my guy had almost 100% gain. I was wondering how he could have such a big gain within one day.

[Catherine]

ALL the gain is reported in the W-2 -- that's what the "Code V" means.  So he is actually getting taxed at ordinary income rates for what would otherwise be a capital gain.

 

Basis includes all the amount that was added to his W-2 noted by the Code V.  Without the stock sale, his W-2 would be LOWER by that Code V amount.  

 

So there is indeed a small capital loss in the amount of the transaction fees (generally $10 to $45, depending on the brokerage firm).  

 

And they never withhold enough tax in the W-2.  Ever.  

[Terry D EA]

Thanks Catherine. There is still the need for the Sch D Correct? I think I see where the loss comes from and the amount. I guess I have been treating this like any other normal stock sale and I shouldn't have.

[jklcpa]

Terry, this transaction actually results in the recipient being taxed on the difference between proceeds and exercise price, and is ultimately taxed at ordinary rates because it is considered compensation on his W-2.  Here's how it works:

 

He got $44K. That is proceeds.  Report on 8949.

 

The basis has two parts. It is the exercise price shown on the paper from Morgan Stanley, the gross amount before withholdings, AND ADD TO THAT...

The basis ALSO includes the amount shown on his W-2 because he is going to pay tax on that at ordinary rates, so he gets to use that as basis too.

Those 2 figures added together should come out to very close to the proceeds because there were some trading fees or transaction costs to sell the stock. That will generate the small cap loss that everyone is talking about.

 

Yes, you need the 8949 to report the part that is the cap loss from the transaction fees.

[Catherine]

Thanks Catherine. There is still the need for the Sch D Correct? I think I see where the loss comes from and the amount. I guess I have been treating this like any other normal stock sale and I shouldn't have.

Like Judy said -- yes you still need the Sch D & 8949 to show the capital loss (=transaction fees).

 

And you are very welcome!  Folks here have given me priceless advice and instructions; I'm glad to be able to give back a little.

Edited February 13, 2015 by Catherine

[Terry D EA]

Thanks to everyone especially Judy and Catherine for explaining this further. You all help so very much at the most crucial times.

[joanmcq]

BTW, the code V means they are NQSOs.

[Terry D EA]

Just an update on this thread. I don't know why I was unable to see what needed to be done with this transaction from the start. After taking the advice from my dear colleagues here, the whole thing finally made sense to me. The final outcome is there was a small loss that totaled up to the broker fees and other fees at $41.00. So, thanks again to everyone who posted responses and I hope someday I can be of some help to you folks as well. Thanks Joan for the clarification on the code V.

 

Here are my figures for your review:

 

Gross proceeds 44,434.05 (Cost)

Sales 44,434.05 - 40.99 = 44,393.06  (sale price)

44,434.05 - 44,393.06= 40.99 (loss)

 

BTW Catherine there appeared to be enough Wh cause he did receive both a Fed and State refund. Mind you, other things in his Sch A helped as well. Maybe odd but it worked out okay.

Edited February 14, 2015 by Terry D

[Catherine]

Good!  Most places withhold 10% for tax for people in higher brackets or AMT territory - and few withhold any state tax.  My folks have learned to contact me after one of these sales to figure if they need to make an estimated payment, rather than get hammered in April (including underpayment penalties).  'Course, some of them get a bit more than $45K on these sales.  Must be nice...