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Subject:   Exercise Options
Date:   Mon, 23 Feb 2004
From:   Bonnie

Hi,

Confused about options. I exercised some options for a non-qualified plan. I believe the employer withheld federal and state taxes. The 1099-B showed that taxes were withheld in Box 5 description. I did not receive any money for the transaction as all money remains in the plan. Do I need to report a gain or loss? Citigroup Global Markets Inc. states that if this income is taxable and the IRS determines that it is not reported a penalty will apply.

Thanks for your help.
Bonnie

Answer

Date:   Thu, 04 Mar 2004

Hello Bonnie,

If the transaction was handled properly, your employer should have included additional wages income and withholding relating to this transaction on your Form W-2. Since you received a Form 1099-B (presumably for shares sold to pay the withheld taxes), you should report the net sale proceeds on Schedule D. The cost for the shares is the fair market value on the date of exercise (equals the option price paid plus the income reported on Form W- 2). You should have received a Confirmation of Exercise statement from the company that gives this information.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified 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.