How to Report Stock Options
- 1). Report a non-qualified stock option only when it is exercised. The difference between the strike price you paid and the market price on the day the option was exercised is called the compensation element. The compensation element will be included in the amount listed in box 1 of your W-2 form. In the event your employer doesn't include the compensation element, you are responsible for declaring it as part of the amount entered on line 7 of your 1040 income tax return. If you choose to hold the stock, rather than sell it, that's all that is required to report non-qualified stock options.
- 2). Complete Schedule D, Part 1 (Capital Gains and Losses) if you sell the stock right away or anytime before year's end. Use the market price at the time of exercise as your cost basis when filling out Schedule D. Schedule D allows you to report any difference between the market price when exercised and the actual sale price as a capital gain or loss. You will also be able to report broker's commissions as a loss.
- 3). Report non-qualified stock options sold after the end of the year of exercise using Schedule D. There is one difference. Since the compensation amount must be reported for the year of exercise, it's considered part of the cost basis for sale of the stock in later years. Consequently, you use the market price on the day of exercise as your cost basis and otherwise treat the sale as an ordinary stock sale.
- 4). Report qualified (also called incentive) stock options for the tax year in which the stock is sold, not when they are exercised. A qualified stock option is a special type of employee stock option. If the stock is held for at least one year after the date of exercise, all of your profit qualifies for lower capital gains tax rates (if you sell the stock in less than a year it's treated as a non-qualified stock option). When you complete Schedule D, use the strike price you paid for the stock as your cost basis, not the market price at the time of exercise.
- 5). Attach form 1099B to your income tax return. This is the form your broker will send you documenting the sale of the stock and the amount of any commissions or other fees you paid as part of the transaction.
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