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Date:   Mon, 13 Jun 2005
From:   Hemant

Hi Michael

I exercised 2,000 stock options during March, 2004. The fair market value of the shares was $45 and the option price was $13. I sold 610 shares to pay the option price. How should I report these transactions on my 2004 income tax returns?

Thanks
Hemant

Answer

Date:   Wed, 06 Jul 2005

Hello Hemant,

Your employer should have included 610 X ($45 - $13) = $19,520 on your W-2 as additional wages. If not, I suggest reporting it as additional income. Report the sales proceeds (about $27,450) and $27,450 tax basis of the shares in the short-term gain or loss section of Schedule D. Report 1,390 X ($45 - $13) = $44,480 at line 13 on Form 6251.

If you have many more of these transactions and need help, hire a tax return preparer.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.