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Until you actually sell stocks acquired under an Incentive Stock Option (ISO), there is nothing to report as a capital gain or loss.  Below is useful information for both possible situations:

  • you still hold the stock at the end of the year after it has been exercised 
  • for the year you actually sell the stock.

Per IRS Publication 525 Taxable and Nontaxable Income, starting on page 11 (below is only a portion of the instructions - review the full instructions, including examples, by clicking the link to access the IRS publication):

Statutory Stock Options

There are two kinds of statutory stock options.

  • Incentive stock options (ISOs), and
  • Options granted under employee stock purchase plans.

For either kind of option, you must be an employee of the company granting the option, or a related company, at all times during the period beginning on the date the option is granted and ending 3 months before the date you exercise the option (for an ISO, 1 year before if you're disabled). Also, the option must be nontransferable except at death.

If you don't meet the employment requirements, or you receive a transferable option, your option is a nonstatutory stock option.

Grant of option. If you receive a statutory stock option, don't include any amount in your income when the option is granted.

Exercise of option. If you exercise a statutory stock option, don't include any amount in income when you exercise the option.

Alternative minimum tax (AMT).  For the AMT, you must treat stock acquired through the exercise of an ISO as if no special treatment applied. This means that, when your rights in the stock are transferable or no longer subject to a substantial risk of forfeiture, you must include as an adjustment in figuring alternative minimum taxable income the amount by which the FMV of the stock exceeds the option price. Enter this adjustment on line 2i of Form 6251. Increase your AMT basis in any stock you acquire by exercising the ISO by the amount of the adjustment. However, no adjustment is required if you dispose of the stock in the same year you exercise the option..

RECORDS: Your AMT basis in stock acquired through an ISO is likely to differ from your regular tax basis. Therefore, keep adequate records for both the AMT and regular tax so that you can figure your adjusted gain or loss..

TIP: IIf you exercise an ISO during 2019, you should receive Form 3921, or a statement, from the corporation for each transfer made during 2019. The corporation must send or provide you with the form by January 31, 2020. Keep this information for your records.

To enter the AMT adjustment (if necessary) mentioned above for Form 6251, in the TaxAct® program:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal
  2. Click Taxes in the middle of the screen to expand the category and then click Alternative minimum tax 
  3. Continue to the screen AMT - Incentive Stock Options. If the stock was not sold by year end you would need to compute the amount to include in AMT income. The amount to include on this line is the total fair market value of the stock when you exercised the option minus any amount you paid to acquire the stock or acquire the option

IRS Form 3921 Exercise of an Incentive Stock Option Under Section 422(b), is for informational purposes only and should be kept with your records. It does not need to be entered into your return unless you still hold the stock at year end (if you do, see the information above regarding Alternative Minimum Tax (AMT)).  You will need this information when you sell the stock. At the time that you sell the stock you should receive a Federal Form 1099-B which would need to be reported on your tax return. The information on Form 3921 will help in determining your cost or other basis as well as your holding period.

Instructions for Employee

You have received the Form 3291 because your employer (or transfer agent) transferred your employer's stock to you pursuant to your exercise of an incentive stock option (ISO). You must recognize (report) gain or loss on your tax return for the year in which you sell or otherwise dispose of the stock. Keep this form and use it to figure the gain or loss. For more information, see IRS Publication 525 Taxable and Nontaxable Income.

When you exercise an ISO, you may have to include in alternative minimum taxable income a portion of the fair market value of the stock acquired through the exercise of the option.

Reporting sales of Incentive Stock Options (ISO) in the year of sale

The Form 1099-B received from the sale of Incentive Stock Options (and any applicable information reported on Form W-2 in the year of sale) would be entered in the Investment Income section of TaxAct as follows:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal
  2. Click Investment Income in the Federal Quick Q&A Topics menu to expand the category and then click Gain or loss on sale of investments
  3. Click Capital gain or loss (Form 1099-B)
  4. Click +Add Form 1099-B to create a new copy of the form or click Review to review a form already created (if adding a new form, choose Step-by-Step Guidance on the following screen)
  5. Enter the information from the Form 1099-B received, and when you reach the screen titled Investment Sales - Other Items, select Incentive stock option plan (ISO), then click Continue
  6. The next screen, titled Investment Sales - Incentive stock option plan (ISO), provides information on reporting the sale of stock acquired through an ISO. Right above the Back button there is also an Info Icon which, if clicked, provides more details and examples regarding Incentive Stock Options. 
  7. If you click Yes on this screen (to confirm that an amount from the sale was included as wages in box 1 of Form W-2), on the following screen you will be provided information and the option to enter an adjustment amount for the Form 1099-B to adjust the cost basis (the "Adjustment amount:" field should include only the amount of the adjustment).

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