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Subject:   Tax Treatment of NSO
Date:   Wed, 09 Mar 2005
From:   Al

Michael,

Thanks in advance for your response.

During 2004, I exercised a NQO and sold the shares on the same day, for a net $18,000 of income. There was $7,000 of federal tax withheld from the sale proceeds. The company included the income in my total wages.

I also received a 1099-B for the sale proceeds. Am I also required to report this transaction on Schedule D?

Regards,
Al

Answer

Hello Al,

Yes. Since you were issued a 1099-B form, you should report the sale for matching purposes. The tax basis for the stock is the option price plus the ordinary income included in your wages on Form W-2. This should be close to the selling price for the stock. In most cases, people report a loss of a few dollars for the sale on Schedule D.

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.