Reporting employee stock options on tax return

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 do I enter income from exercising stock options?
The tax implications depend on whether you exercise your option with a 'same-day sale' or if you use the money from exercising your stock options to immediately purchase and hold company shares. The vast majority of people exercise their options using a same-day sale.
Same-day sale - With a same-day sale, the stockbroker purchases the shares on your behalf at your option price, then immediately sells them again at the market price. Your employer records a taxable benefit in box 38 of your T4 slip for the difference between the fair market value of the share when you exercised the option and your option price. This amount is converted to Canadian dollars using the exchange rate for the date of exercise, and is included in employment income. It will be on your T4 slip.
On February 19, 2010 , an employee is granted an option to purchase 10,000 of the employer's shares at $10 per share. The option can be exercised immediately.
The employer will include the $20,000 on the employee's 2010 T4 slip. The employer will also report a stock option deduction on the employee's T4.
Stock option deduction.
When you exercise stock options, your T4 slip will also include an entry in box 39 or 41 for a stock option deduction. This deduction ensures that your stock option benefit gets the same tax treatment as ordinary profit on the sale of stock (capital gain). The deduction is 1/2 of the taxable benefit.
When you enter the amounts from your T4 slip in the T-slips and receipts entry screen, TurboTax transfers the amount from box 38 to line 101 of your T1 General and the amount from box 39 or 41 to line 249.
If you hold the shares instead of selling them.
If you don't sell the stock, you still have to report the benefit in the year you exercise the options, unless you defer the taxable benefit . See Deferring the benefit for details.
When you sell the shares, you may realize a capital gain or loss . You have to report the capital gain or loss in the year you dispose of the securities.
Generally, you report the transaction in the "Mutual fund units and other shares including publicly traded shares" area of Schedule 3 of your return. However, if the eligible securities are qualified small business corporation shares, report the transaction in the "Qualified small business corporation shares" area instead.
You report the transaction in the Investments Profile area in the Income section of the regular Interview.
Select all the checkboxes that apply to you, including Capital Gains or Losses . In the Capital Gains Profile , select Sold stocks, bonds, real estate, or other capital property . Then, in the Stock Sales and Other Property Profile, select Sold mutual fund units and other shares including publicly traded shares , then proceed through the interview.
Or click Take Me There to go there now.
Proceeds of Disposition is the money you received when you sold the stock.
To calculate the adjusted cost base of your shares, add the following two amounts:
the actual price you paid to purchase the shares; and.
When you buy shares through an employee stock program, your employer records a taxable benefit in box 38 of your T4 slipT4 slip for the difference between the fair market value of the share when you exercised the option and your option price. This amount will be converted to Canadian dollars using the exchange rate for the date of exercise, and is included in employment income. It will be on your T4 slip.
On February 19, 2010 , an employee is granted an option to purchase 10,000 of the employer's shares at $10 per share. The option can be exercised immediately.
The employer includes the $20,000 taxable benefit on the employee's 2010 T4 slip.
Stock option deduction: Your T4 slip will also include an entry in box 39 or 41 for a stock option deduction. This deduction ensures that your stock option benefit gets the same tax treatment as ordinary profit on the sale of stock (capital gain). The deduction is 1/2 of the taxable benefit.
Outlays and Expenses include amounts you paid to buy and sell the securities, such as stockbroker fees.
In 2004, an eligible employee of Widget Corporation, received an option to buy 5,000 eligible shares at $9 each (the actual FMV of each share at the time the option was granted).
Widget Corporation is not a Canadian-controlled private corporation. On February 1, 2010 , Emily exercised her option to buy the shares. The FMV of the shares at that time was $15 each. In 2011 , she sells her shares for $20 each.
Emily's tax implications are as follows:
In 2005 , when she was granted the option, there were no tax implications.
In 2004 , when she bought the shares, the taxable benefit on the entire 5,000 shares she purchased is calculated as follows:
There are no tax implications because she elected to defer the taxable benefit arising from the purchase of shares by filing Form T1212, Statement of Deferred Security Options Benefits , with $30,000 entered on line 2.

How to Report Stock Options on Your Tax Return.
Updated for Tax Year 2017.
Stock options give you the right to buy shares of a particular stock at a specific price. The tricky part about reporting stock options on your taxes is that there are many different types of options, with varying tax implications.
The underlying principle behind the taxation of stock options is that if you receive income, you will pay tax. Whether that income is considered a capital gain or ordinary income can affect how much tax you owe when you exercise your stock options. There are two main types of stock options: Employer stock options and open market stock options.
Receiving an Employer Stock Option.
The two main types of stock options you might receive from your employer are:
These employer stock options are often awarded at a discount or a fixed price to buy stock in the company. While both types of options are often used as bonus or reward payments to employees, they carry different tax implications.
The good news is that regardless of the type of option you are awarded, you usually won't face any tax consequences at the time you receive the option. No matter how many statutory or non-statutory stock options you receive, you don't have to report them when you file your taxes until you exercise those options, unless the option is actively traded on an established market or its value can be readily determined. This exception is rare but does happen at times.
Exercising an Option.
When you exercise an option, you agree to pay the price specified by the option for shares of stock, also called the award, strike, or exercise price. For example, if you exercise the option to buy 100 shares of IBM stock at $150/share, at the time of exercise you'll effectively exchange your option for 100 shares of IBM stock, and you'll no longer have the right to buy additional IBM shares at $150/share.
When you exercise an incentive stock option (ISO) , there are generally no tax consequences, although you will have to use Form 6251 to determine if you owe any Alternative Minimum Tax (AMT). However, when you exercise a non-statutory stock option (NSO) , you're liable for ordinary income tax on the difference between the price you paid for the stock and the current fair market value.
If you exercise a non-statutory option for IBM at $150/share and the current market value is $160/share, you'll pay tax on the $10/share difference ($160 - $150 = $10). For example:
100 shares x $150 (award price)/share = $15,000 100 shares x $160 (current market value)/share = $16,000 $16,000 - $15,000 = $1,000 taxable income.
Since you'll have to exercise your option through your employer, your employer will report the amount of your income on line 1 of your Form W-2. You should include this in your ordinary wage or salary income when you file your tax return.
Selling Stock.
When you sell stock you've acquired via the exercise of any type of option, you might face additional taxes. Just as if you bought a stock in the open market, if you acquire a stock by exercising an option and then sell it at a higher price, you have a taxable gain. If you satisfy the holding period requirement, by either keeping the stock for 1 year after exercising the option or 2 years after the grant date of the option, you will report a long-term capital gain, which is usually taxed at a lower rate.
If you don't meet the holding period requirement, your gain is considered short-term and taxable as ordinary income. You should report a long-term gain on Schedule D of Form 1040. A short-term gain should appear in box 1 of your W-2 as ordinary income, and you should file it as wages on line 7 of Form 1040.
Open Market Options.
If you buy or sell a stock option in the open market, the taxation rules are similar to options you receive from an employer. When you buy an open-market option, you're not responsible for reporting any information on your tax return.
However, when you sell an option -- or the stock you acquired by exercising the option -- you must report the profit or loss on Schedule D of your Form 1040. If you've held the stock or option for less than one year, your sale will result in a short-term gain or loss, which will either add to or reduce your ordinary income. Options sold after a one year or longer holding period are considered long-term capital gains or losses.
When you use TurboTax to prepare your taxes, we’ll do these calculations and fill in all the right forms for you. We can even directly import stock transactions from many brokerages and financial institutions, right into your tax return.
From stocks and bonds to rental income, TurboTax Premier helps you get your taxes done right.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

Reporting employee stock options on tax return

The tricky part about reporting stock options on your taxes is that there are . as bonus or reward payments to employees , they carry different tax implications.
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