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Reporting Incentive Stock Options on Your Tax Return

Incentive stock options can be reported as wages, capital gains or AMT income

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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

Increase your AMT income by the spread between the fair market value of the shares and the exercise price. This can be calculated using data found on Form 3921 provided by your employer. First, find the fair market value of the unsold shares (Form 3921 box 4 multiplied by box 5), and then subtract the cost of those shares (Form 3921 box 3 multiplied by box 5). The result is the spread, and is reported on Form 6251 line 14.

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

Report the gain on your Schedule D and Form 8949. You'll report the gross proceeds from the sale, which will be reported by your broker on Form 1099-B. You'll also report your regular cost basis (the exercise or strike price, found on Form 3921). You'll also fill out a separate Schedule D and Form 8949 to calculate your capital gain or loss for AMT purposes. On that separate schedule you'll report gross proceeds from the sale and your AMT cost basis (exercise price plus any previous AMT adjustment). On Form 6251, you'll report a negative adjustment on line 17 to reflect the difference in gain or loss between the regular and AMT gain calculations. Refer to the Instructions for Form 6251 for details.

Reporting a disqualifying disposition of ISO shares

Compensation income is reported as wages on Form 1040 line 7, and any capital gain or loss is reported on Schedule D and Form 8949. Compensation income may already be included on your Form W-2 wage and tax statement from your employer in the amount shown on box 1. Some employers will provide a detailed analysis of your box 1 amounts at the top portion of your W-2. If the compensation income has already been included on your W-2, then simply report your wages from Form W-2 box 1 on your Form 1040 line 7. If the compensation income has not already been included on your W-2, then calculate your compensation income, and include this amount as wages on line 7, in addition to the amounts from your Form W-2. On your Schedule D and Form 8949, you'll report the gross proceeds from the sale (shown on Form 1099-B from your broker) and your cost basis in the shares. For disqualifying dispositions of ISO shares, your cost basis will be the strike price (found on Form 3921) plus any compensation income reported as wages. If you sold the ISO shares in a year other than the year in which you exercised the ISO, you will have separate AMT cost basis, so you'll utilize a separate Schedule D and Form 8949 to report the different AMT gain and you'll use Form 6251 to report a negative adjustment for the difference between the AMT gain and the regular capital gain.
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