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Until you sell stocks acquired under an Incentive Stock Option (ISO), there is nothing to report as a capital gain or loss. The following information is useful if you still hold the stock at the end of the year after it has been exercised, or for the year you sell the stock.

Per IRS Publication 525 Taxable and Nontaxable Income, page 12:

Statutory Stock Options

There are two kinds of statutory stock options.

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 If you exercise an ISO during 2023, you should receive Form 3921, or a statement, from the corporation for each transfer made during 2023. The corporation must send or provide you with the form by January 31, 2024. Keep this information for your records.

To enter the AMT adjustment for Form 6251 Alternative Minimum Tax—Individuals, in the TaxAct program (if you need help accessing Form 6251, go to our Form 6251 - Alternative Minimum Tax - AMT FAQ):

  1. From within your Form 6251, continue with the interview process until you reach the screen titled AMT - Incentive Stock Options.
  2. Click the data entry field below Exercise of incentive stock options (excess of AMT income over regular tax income), and type the amount (if the stock was not sold by year-end, you need to compute the amount to include in AMT income; the amount to include on this line is the total fair market value (FMV) of the stock when you exercised the option minus any amount you paid to acquire the stock or the option).

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 previous information 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 Proceeds From Broker and Barter Exchange Transactions 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.

Per IRS Form 3921, page 4:

Instructions for Employee

You have received 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.

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.

To report sales of Incentive Stock Options on Form 1099-B in the TaxAct program (if you need help accessing Form 1099-B, go to our Form 1099-B - Entering Capital Gains and Losses in Program FAQ):

  1. From within your Form 1099-B, continue with the interview process until you reach the screen titled Investment Sales - Other Items, and click the circle next to Incentive stock option plan (ISO).
  2. On the screen titled Investment Sales - Incentive stock option plan (ISO), click Yes if any amount from the sale was included as wages in Box 1 of Form W-2 (click the info icon below the last paragraph for more details and examples regarding Incentive Stock Options).
  3. On the screen titled Investment Sales - ISO Form W-2 Income, enter the adjustments amounts for Form 1099-B to adjust the cost basis - this should only include the amount of the adjustment.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the webpage or document at the time it is accessed.

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