Here’s what HIVE AI had to say about “How do I report stock options or restricted stock units (RSUs)?”:
Reporting stock options and Restricted Stock Units (RSUs) on your tax return depends on the type of equity compensation you’ve received and the specific events that occurred during the tax year. Here’s a comprehensive guide on how to properly report these equity-based compensation instruments.
Stock Options
There are two main types of stock options with different tax treatments:
1. Incentive Stock Options (ISOs)
ISOs receive special tax treatment under the Internal Revenue Code:
- When Granted: No taxable event occurs when ISOs are granted.
- When Exercised: Generally, no regular income tax is due at exercise. However, the difference between the exercise price and fair market value (the “spread”) may trigger Alternative Minimum Tax (AMT).
- When Sold: If you meet the holding requirements (hold the stock for at least 1 year after exercise and 2 years after grant), the entire gain is treated as long-term capital gain. If you don’t meet these requirements (a “disqualifying disposition”), the spread at exercise is taxable as ordinary income.
Every corporation that transfers shares of stock to any person pursuant to that person’s exercise of an incentive stock option must make a return at such time and in such manner as the Secretary may prescribe. IRC § 6039(a) Your employer will report the ISO exercise to the IRS on Form 3921, which you’ll receive if you exercised ISOs during the tax year.
2. Non-Qualified Stock Options (NQSOs)
- When Granted: Generally no taxable event if the options have no readily ascertainable fair market value at grant.
- When Exercised: The spread between the exercise price and fair market value is taxable as ordinary income and subject to withholding taxes. Your employer will include this amount on your Form W-2.
- When Sold: Any additional gain or loss after exercise is capital gain or loss.
For tax reporting purposes, if a covered security is acquired through the exercise of an option, the amount received with respect to the grant or paid with respect to the acquisition of such option shall be treated as an adjustment to gross proceeds or as an adjustment to basis, as the case may be. IRC § 6045(h)
When reporting adjusted basis for stock acquired through option exercise, your employer is required to report adjusted basis based on the amount you paid under the terms of the option. Your employer is not required to take any amount includible as wage income with respect to the purchase of the shares into account when reporting adjusted basis, but has the choice to take income recognized upon the exercise of the compensatory option into account when determining adjusted basis. REG-101896-09
Restricted Stock Units (RSUs)
RSUs are treated differently from stock options:
Restricted Stock Units are unsecured, unfunded promises to pay cash or stock in the future and are considered nonqualified deferred compensation subject to IRC §§ 3121(v)(2), 451 and 409A. Typically, one Restricted Stock Unit represents one share of actual stock. Restricted Stock Units generally are not taxable at grant if they meet the requirements of, or otherwise are exempt from, IRC §§ 451 and 409A. Generally, a taxable event does not take place until the vesting of the Restricted Stock Unit. In addition, Restricted Stock Units are not considered property for purposes of IRC § 83 since no actual property has been transferred, and therefore an IRC § 83(b) election cannot be made with respect to the grant of a Restricted Stock Unit. IRS – Publication 5992: Equity (Stock) – Based Compensation Audit Technique Guide
The Internal Revenue Code specifically states that Section 83 (other than subsection (i)), including any election under subsection (b), shall not apply to restricted stock units. IRC § 83(i)
- When Granted: No taxable event occurs when RSUs are granted.
- When Vested/Settled: The fair market value of the shares received at vesting/settlement is taxable as ordinary income and will be included on your Form W-2. Taxes are typically withheld at this time.
- When Sold: Any additional gain or loss after vesting/settlement is capital gain or loss.
Typically, the terms of RSUs provide that the payment of the stock will occur upon or within a short period of time following the satisfaction of the vesting condition. For income tax purposes, if payment occurs no later than two and a half months after the end of the taxable year in which the vesting condition is satisfied, then the payment is not considered deferred compensation. CCA-202327014
How to Report on Your Tax Return
For Stock Options:
- ISOs:
- If you only exercised ISOs but didn’t sell the shares in the same year: Report the exercise information on Form 6251 for AMT calculation purposes.
- If you sold ISO shares: Report the sale on Form 8949 and Schedule D. If it was a qualifying disposition, report only the capital gain. If it was a disqualifying disposition, report the ordinary income portion on Schedule 1 and the capital gain/loss on Form 8949 and Schedule D.
- NQSOs:
- The ordinary income from exercise is already included in your W-2 wages.
- When you sell the shares, report the sale on Form 8949 and Schedule D, using the adjusted basis (which includes the amount already taxed as ordinary income).
In the case of the lapse or closing transaction of an option on a specified security or the exercise of a cash-settled option on a specified security, reporting is required for the calendar year which includes the date of such lapse, closing transaction, or exercise. IRC § 6045(h)
For RSUs:
- When RSUs Vest/Settle:
- The value of the shares received is already included in your W-2 wages.
- When You Sell the Shares:
- Report the sale on Form 8949 and Schedule D.
- Your basis in the shares is the amount that was included in your income when the RSUs vested/settled.
Special Considerations
Section 83(i) Election for Qualified Equity Grants
For qualified stock options or RSUs with the same rights and privileges granted to at least 80% of all employees, an election with respect to qualified stock must be made no later than 30 days after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier. An election under IRC § 83(i) is made in a manner similar to an election made under IRC § 83(b). Notice 2018-97 provides additional guidance on the application of IRC § 83(i). IRS – Publication 5992: Equity (Stock) – Based Compensation Audit Technique Guide
Employer Reporting Requirements
Your employer has specific reporting requirements for equity compensation:
For provisions requiring the reporting of certain acts with respect to a qualified stock option, an incentive stock option, options granted under employer stock purchase plans, or a restricted stock option, see section 6039. IRC § 424(j)
If a contractual agreement exists with a recognized broker or financial institution pursuant to which shares acquired upon exercise of the option will be immediately deposited into a brokerage account established on behalf of the transferor, then the deposit of shares by the transferor into the brokerage account following the exercise of the option is the first transfer of legal title of the shares acquired by the transferor, and the corporation is only required to file a return relating to such transfer of legal title. Every corporation that transfers any share of stock pursuant to the exercise of an option described in this paragraph shall identify such stock in a manner sufficient to enable the accurate reporting of the transfer of legal title to such shares. Such identification may be accomplished by assigning to the certificates of stock issued pursuant to the exercise of such options a special serial number or color. Tresuary Reg. 1.6039-1
Record-Keeping Best Practices
Maintain detailed records of:
- Grant documents showing grant date, exercise price, and vesting schedule
- Exercise or settlement confirmations
- Statements showing stock sales
- Forms 3921 (for ISOs) or 3922 (for ESPP)
- Any relevant company communications about equity compensation
Conclusion
Properly reporting stock options and RSUs on your tax return is essential to avoid potential penalties and interest. The tax treatment varies significantly depending on the type of equity compensation and the specific events that occurred during the tax year. If your situation is complex, consider consulting with a tax professional who specializes in equity compensation.
Remember that your employer will provide you with the necessary tax forms (W-2, 1099-B, 3921, etc.) to help you report these transactions correctly, but the ultimate responsibility for proper reporting rests with you as the taxpayer.
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