CostBasis.
Stock can be acquired through stock options in various ways:
2. Non-qualified stock options.
3. Restricted stock options.
4. Exercise of a call option you bought.
5. Exercise of a put option you sold.
• granted under a plan approved by shareholders;
• exercisable only by the individual employee or his or her heir;
• exercisable within ten years;
• held for at least two years;
• have an option exercise price no less than fair market value of the stock at the time of.
• not held by an owner of more than ten percent of the voting power;
• held by a person who is an employee of the corporation from the grant date until at least.
three months before exercise (one year if disabled.)
A final caution is that qualified incentive stock options that first become exercisable during any tax year are reclassified as non-qualified if the total fair market value of the stock exceeds $100,000.

Incentive stock options cost basis

If you receive an option to buy stock as payment for your services, you may have income when you receive the option, when you exercise the option, or when you dispose of the option or stock received when you exercise the option. There are two types of stock options:
Options granted under an employee stock purchase plan or an incentive stock option (ISO) plan are statutory stock options . Stock options that are granted neither under an employee stock purchase plan nor an ISO plan are nonstatutory stock options .
Refer to Publication 525, Taxable and Nontaxable Income , for assistance in determining whether you've been granted a statutory or a nonstatutory stock option.
Statutory Stock Options.
If your employer grants you a statutory stock option, you generally don't include any amount in your gross income when you receive or exercise the option. However, you may be subject to alternative minimum tax in the year you exercise an ISO. For more information, refer to the Form 6251 (PDF). You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don't meet special holding period requirements, you'll have to treat income from the sale as ordinary income. Add these amounts, which are treated as wages, to the basis of the stock in determining the gain or loss on the stock's disposition. Refer to Publication 525 for specific details on the type of stock option, as well as rules for when income is reported and how income is reported for income tax purposes.
Incentive Stock Option - After exercising an ISO, you should receive from your employer a Form 3921 (PDF), Exercise of an Incentive Stock Option Under Section 422(b) . This form will report important dates and values needed to determine the correct amount of capital and ordinary income (if applicable) to be reported on your return.
Employee Stock Purchase Plan - After your first transfer or sale of stock acquired by exercising an option granted under an employee stock purchase plan, you should receive from your employer a Form 3922 (PDF), Transfer of Stock Acquired Through an Employee Stock Purchase Plan under Section 423(c) . This form will report important dates and values needed to determine the correct amount of capital and ordinary income to be reported on your return.
Nonstatutory Stock Options.
If your employer grants you a nonstatutory stock option, the amount of income to include and the time to include it depends on whether the fair market value of the option can be readily determined .
Readily Determined Fair Market Value - If an option is actively traded on an established market, you can readily determine the fair market value of the option. Refer to Publication 525 for other circumstances under which you can readily determine the fair market value of an option and the rules to determine when you should report income for an option with a readily determinable fair market value.
Not Readily Determined Fair Market Value - Most nonstatutory options don't have a readily determinable fair market value. For nonstatutory options without a readily determinable fair market value, there's no taxable event when the option is granted but you must include in income the fair market value of the stock received on exercise, less the amount paid, when you exercise the option. You have taxable income or deductible loss when you sell the stock you received by exercising the option. You generally treat this amount as a capital gain or loss. For specific information and reporting requirements, refer to Publication 525.

How to avoid paying double tax on employee stock options.
Anyone who participates in an employee stock option or stock purchase plan at work could overpay their taxes — perhaps by a lot — if they don’t understand a reporting requirement that took effect in 2014.
Under the requirement, all brokers must report cost basis on Form 1099-B for stock that was both acquired and sold on or after Jan. 1, 2014, through an employee stock option or purchase plan in a way that could result in double taxation, unless the employee makes an adjustment on Form 8949. The new requirement does not apply to restricted stock awarded to employees.
“It’s very confusing and scary,” says Barbara Baksa, executive director of the National Association of Stock Plan Professionals. “The important thing is not to assume that the cost basis reported on Form 1099-B is correct. You have to have confidence in your understanding of how this works to report the adjustment and not be afraid the IRS will treat it as a mistake on your part.”
Stock compensation is common in the Bay Area, especially in tech. Employees who sold company stock last year should begin receiving their 1099s in mid-February. The IRS has not gone out of its way to warn taxpayers about this ticking time bomb. Employees should pay close attention to everything they get from their employer and brokerage firms and strongly consider consulting a tax professional.
Brokerage firms use Form 1099-B to report the sale of stock and other securities to customers and the IRS. Cost basis is what you paid for the stock, including commissions. Proceeds are what you got from the sale, after commissions.
In a normal stock sale, the difference between your cost basis and proceeds is reported as a capital gain or loss on Schedule D. End of story.
However, stock acquired under an employee option or purchase plan is different. At least some of your profit is considered compensation and taxed as ordinary income. It will be included as wages, in box 1 of your W-2 Form. But the sale also must be reported on Schedule D.
And therein lies the rub: Unless you adjust your cost basis, by adding in the compensation component, that amount will be taxed twice — as ordinary income and a capital gain.
From 2011 through 2013, brokers had the option of making this adjustment for the employee and reporting the correct cost basis on Form 1099-B. And most did.
Under the new rules, brokers cannot make this adjustment on shares acquired on or after Jan. 1, 2014, through an employee stock option or purchase plan. They can only report the unadjusted basis, or what the employee paid for the stock. To avoid double taxation, the employee must make an adjustment on Form 8949.
Warning: Do not use the box labeled “1g Adjustments” on Form 1099-B to make this adjustment; that is for something else entirely. The information needed to make the adjustment will probably be in supplemental materials that come with your 1099-B.
Let’s start with a simple example: Say you were granted an option to acquire stock in your company at $10 per share. (We will assume this is a nonqualified option; incentive stock options are a bit different but also fall under the new requirement.)
When the stock is at $30, you exercise your option and simultaneously sell the stock. You have a gain of $20. All of it is ordinary income.
“The company will withhold tax and report that $20 on your W-2 as income. The broker will issue a 1099 for the sale. It will include a cost basis of $10, what you paid for the stock. But your basis is really $30,” Baksa says.
To avoid paying tax on that $20 twice, you must make an adjustment on Form 8949.
What happens if you exercised the option in 2014, when the market price is $30, but hold onto the stock and sell it for $40 in 2015?
In this case, $20 will be added to W-2 for 2014, but you won’t get a 1099-B for 2014.
For 2015, you will get a 1099-B showing $10 in cost basis and $40 in sales proceeds. To avoid double taxation on the $20, you must make an adjustment on Form 8949. The remaining $10 will be taxed as a capital gain.
For shares acquired under an employee stock purchase plan, the adjustment depends on how long you hold the stock after purchase. The scenarios are too complex to give examples at this point.
Note that the new rules apply only to stock acquired in 2014 or later under these plans. It’s not clear what acquired means. Some brokerage firms are using the date a stock option was granted as the acquisition date; some are using the date a stock option was exercised. For stock purchase plans, the acquisition date is usually the purchase date, Baksa says.
In any case, for stock that was acquired under one of these plans before 2014, brokers have the option of reporting the right basis (adjusted) or the wrong basis (unadjusted). Not all brokers are reporting it the same way.
For consistency, some brokers, including E-Trade and Fidelity, will report the unadjusted basis for all shares sold in 2014 under these plans regardless of when they were acquired. Fidelity will include adjusted basis in a supplemental document.
Charles Schwab is taking one approach for stock options and another for stock purchase plans. It notes that options usually do not vest, or become available for sale, for at least one year after the grant date. As a result, very few customers sold stock in 2014 that was also granted in 2014. So for 2014, it will report adjusted basis for all shares acquired through options. For 2015 and thereafter, it will report unadjusted basis for all option shares.
For shares acquired under employee stock purchase plans, however, Schwab will report unadjusted basis for all shares, regardless of when they were acquired.
Intuit, the maker of TurboTax, says employees who use its tax-preparation software will be able to make the correct adjustments through the interview process. “Regardless of how the broker reports it, we are going to get it right,” says Bob Meighan, a vice president with TurboTax.
Bruce Brumberg, founder of Mystockoptions, said most people who sold stock acquired through option or purchase plans will have compensation income and need to make an adjustment on Form 8949 (unless the broker has made the adjustment). The only times they would not have compensation, and not need to make an adjustment, is if they:
•Exercised an incentive stock option and held it long enough to get a qualifying disposition (at least two years from grant date and one year from purchase).
•Exercised an incentive stock option and sold the stock for less than they paid.
•Sold stock acquired through a purchase plan for less than the purchase price in a qualifying disposition.
The new reporting requirements do not apply to restricted stock. Employees pay nothing for restricted stock. When it vests, the entire value on the vesting date is treated as compensation and added to their W-2 for that year.
Suppose an employee gets restricted stock that is worth $1,000 when it vests and $1,500 when it is sold. The $1,000 is treated as compensation and added to the employee’s W-2.
When the stock is sold, the broker will send a 1099-B showing sales proceeds of $1,500. It has never had to provide a cost basis on the 1099-B, and still doesn’t. Some might provide a cost basis and if they do, it is usually the adjusted basis, which is $1,000.

Learn About Incentive Stock Options.
Find out Form 3291 and How Employee Granted ISO Is Taxed.
Incentive stock options are a form of compensation to employees in the form of stock rather than cash. With an incentive stock option (ISO), the employer grants to the employee an option to purchase stock in the employer's corporation, or parent or subsidiary corporations, at a predetermined price, called the exercise price or strike price. Stock can be purchased at the strike price as soon as the option vests (becomes available to be exercised).
Strike prices are set at the time the options are granted, but the options usually vest over a period of time. If the stock increases in value, an ISO provides employees with the ability to purchase stock in the future at the previously locked-in strike price. This discount in the purchase price of the stock is called the spread. ISOs are taxed in two ways: on the spread and on any increase (or decrease) in the stock's value when sold or otherwise disposed. Income from ISOs are taxed for regular income tax and alternative minimum tax, but are not taxed for Social Security and Medicare purposes.
In order to calculate the tax treatment of ISOs, you'll need to know:
Grant date: the date the ISOs were granted to the employee Strike price: the cost to purchase a share of stock Exercise date: the date on which you exercised your option and purchased shares Selling price: the gross amount received from selling the stock Selling date: the date on which the stock was sold.
How ISOs are taxed depends on how and when the stock is disposed. Disposition of stock is typically when the employee sells the stock, but it can also include transferring the stock to another person or giving the stock to charity.
Qualifying dispositions of incentive stock options.
A qualifying disposition of ISOs simply means that the stock, which was acquired through an incentive stock option, was disposed more than two years from the grant date and more than one year after the stock was transferred to the employee (usually the exercise date).
There's an additional qualifying criteria: the taxpayer must have been continuously employed by the employer granting the ISO from the grant date up to 3 months prior to the exercise date.
Tax treatment of exercising incentive stock options.
Exercising an ISO is treated as income solely for the purpose of calculating the alternative minimum tax (AMT), but is ignored for the purpose of calculating the regular federal income tax. The spread between the fair market value of the stock and the option's strike price is included as income for AMT purposes. The fair market value is measured on the date when the stock first becomes transferable or when your right to the stock is no longer subject to a substantial risk of forfeiture. This inclusion of the ISO spread in AMT income is triggered only if you continue to hold the stock at the end of the same year in which you exercised the option. If the stock is sold within the same year as exercise, then the spread does not need to be included in your AMT income.
Tax treatment of a qualifying dispositions of incentive stock options.
A qualifying disposition of an ISO is taxed as a capital gain at the long-term capital gains tax rates on the difference between the selling price and the cost of the option.
Tax treatment of disqualifying dispositions of incentive stock options.
A disqualifying or nonqualifying disposition of ISO shares is any disposition other than a qualifying disposition. Disqualifying ISO dispositions are taxed in two ways: there will be compensation income (subject to ordinary income rates) and capital gain or loss (subject to the short-term or long-term capital gains rates).
The amount of compensation income is determined as follows:
if you sell the ISO at a profit, then your compensation income is the spread between the stock's fair market value when you exercised the option and the option's strike price. Any profit above compensation income is capital gain. If you sell the ISO shares at a loss, the entire amount is a capital loss and there's no compensation income to report.
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Withholding and Estimated Taxes.
Be aware that employers are not required to withhold taxes on the exercise or sale of incentive stock options. Accordingly, persons who have exercised but not yet sold ISO shares at the end of the year may have incurred alternative minimum tax liabilities. And persons who sell ISO shares may have significant tax liabilities that aren't paid for through payroll withholding. Taxpayers should send in payments of estimated tax to avoid having a balance due on their tax return. You may also want to increase the amount of withholding in lieu of making estimated payments.
Incentive stock options are reported on Form 1040 in various possible ways. How incentive stock options (ISO) are reported depends on the type of disposition. There are three possible tax reporting scenarios:
Reporting the exercise of incentive stock options and the shares are not sold in the same year.
Because you are recognizing income for AMT purposes, you will have a different cost basis in those shares for AMT than for regular income tax purposes. Accordingly, you should keep track of this different AMT cost basis for future reference. For regular tax purposes, the cost basis of the ISO shares is the price you paid (the exercise or strike price). For AMT purposes, your cost basis is the strike price plus the AMT adjustment (the amount reported on Form 6251 line 14).
Reporting a qualifying disposition of ISO shares.
Reporting a disqualifying disposition of ISO shares.
Form 3921 is a tax form used to provide employees with information relating to incentive stock options that were exercised during the year. Employers provide one instance of Form 3921 for each exercise of incentive stock options that occurred during the calendar year. Employees who had two or more exercises may receive multiple Forms 3921 or may receive a consolidated statement showing all exercises.
The formatting of this tax document may vary, but it will contain the following information:
identity of the company that transferred stock under an incentive stock option plan, identity of the employee who exercise the incentive stock option, date the incentive stock option was granted, date the incentive stock option was exercised, exercise price per share, fair market value per share on the exercise date, number of shares acquired,
This information can be utilized to calculate your cost basis in the shares, to calculate the amount of income that needs to be reported for the alternative minimum tax, and to calculate the amount of compensation income on a disqualifying disposition, and to identify the beginning and end of the special holding period to qualify for preferred tax treatment.
Identifying the Qualifying Holding Period.
Incentive stock options have a special holding period to qualify for capital gains tax treatment.
The holding period is two years from the grant date and one year after the stock was transferred to the employee. Form 3921 shows the grant date in box 1 and shows the transfer date or exercise date in box 2. Add two years to the date in box 1 and add one year to the date in box 2.
If you sell your ISO shares after whichever date is later, then you will have a qualifying disposition and any profit or loss will be entirely a capital gain or loss taxed at the long-term capital gains rates.
If you sell your ISO shares anytime before or on this date, then you'll have a disqualifying disposition, and the income from the sale will be taxed partly as compensation income at the ordinary income tax rates and partly as capital gain or loss.
Calculating Income for the Alternative Minimum Tax on Exercise of an ISO.
If you exercise an incentive stock option and don't sell the shares before the end of the calendar year, you'll report additional income for the alternative minimum tax (AMT). The amount included for AMT purposes is the difference between the fair market value of the stock and the cost of the incentive stock option. The fair market value per share is shown in box 4. The per-share cost of the incentive stock option, or exercise price, is shown in box 3. The number of shares purchased is shown in box 5. To find the amount to include as income for AMT purposes, multiply the amount in box 4 by the amount of unsold shares (usually the same as reported in box 5), and from this product subtract exercise price (box 3) multiplied by the number of unsold shares (usually the same amount shown in box 5). Report this amount on Form 6251, line 14.
Calculating Cost Basis for Regular Tax.
The cost basis of shares acquired through an incentive stock option is the exercise price, shown in box 3.
Your cost basis for the entire lot of shares is thus the amount in box 3 multiplied by the number of shares shown in box 5. This figure will be used on Schedule D and Form 8949.
Calculating Cost Basis for AMT.
Shares exercised in one year and sold in a subsequent year have two cost bases: one for regular tax purposes and one for AMT purposes. The AMT cost basis is the regular tax basis plus the AMT income inclusion amount. This figure will be used on a separate Schedule D and Form 8949 for AMT calculations.
Calculating Compensation Income Amount on a Disqualifying Disposition.
If incentive stock option shares are sold during the disqualifying holding period, then some of your gain is taxed as wages subject to ordinary income taxes, and the remaining gain or loss is taxed as capital gains. The amount to be included as compensation income, and usually included on your Form W-2 box 1, is the spread between the stock's fair market value when you exercised the option and the exercise price.
To find this, multiply the fair market value per share (box 4) by the number of shares sold (usually the same amount in box 5), and from this product subtract exercise price (box 3) multiplied by the number of shares sold (usually the same amount shown in box 5). This compensation income amount is typically included on your Form W-2, box 1. If it's not included on your W-2, then include this amount as additional wages on Form 1040 line 7.
Calculating Adjusted Cost Basis on a Disqualifying Disposition.
Start with your cost basis, and add any amount of compensation. Use this adjusted cost basis figure for reporting capital gain or loss on Schedule D and Form 8949.