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Learn to Be a Better Investor. Forgot Password. Since January 1, , brokers are required to report options trades to the IRS. Like options-trading strategies, the tax treatment of options trades is far from simple. Under new broker reporting requirements, options transactions are now reported to the Internal Revenue Service when you close the position, including your cost basis and capital gain or loss.

Be aware that some options transactions such as straddles, short sales and wash sales require special tax treatment and may result in a reportable capital gain before the position is closed.

How to avoid paying double tax on employee stock options

The IRS began requiring brokers to keep track of cost basis for security trades beginning in with equity trades. Options trading was added to the requirement on January 1, Any option trades after that date will have the basis recorded and reported to the IRS on Form B when those options are sold, including calculated capital gains on the transaction. With the new reporting requirements, your broker statement and B will separate short- and long-term capital gains and losses.

From through , brokers had the option of making this adjustment for the employee and reporting the correct cost basis on Form B. And some did. Under the new rules, brokers cannot make this adjustment on shares acquired on or after Jan. They can only report the unadjusted basis — what the employee actually paid. To avoid double taxation, the employee must use Form The information needed to make this adjustment will probably be in supplemental materials that come with your B. It also helps you make better decisions about when to sell.

The rules here apply to qualified stock purchase plans, which give employees certain tax breaks. Most plans are qualified. A typical stock purchase plan might run for six months. During this offering period, employees have a percentage of salary withheld on an after-tax basis. At the end of the period, this money is used to buy stock. Some plans buy it at a discount to the market price on the last day of the period; more generous ones buy it at a discount to the market price on the first or last day of the period, whichever is lower.

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A typical discount is 10 or 15 percent. You can purchase stock at a 15 percent discount to the market price on either date, whichever is lower. For stock purchase plans, the acquisition date is usually the purchase date, Baksa says. In any case, for stock that was acquired under one of these plans before , brokers have the option of reporting the right basis adjusted or the wrong basis unadjusted. Not all brokers are reporting it the same way. For consistency, some brokers, including E-Trade and Fidelity, will report the unadjusted basis for all shares sold in under these plans regardless of when they were acquired.

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Fidelity will include adjusted basis in a supplemental document. Charles Schwab is taking one approach for stock options and another for stock purchase plans. It notes that options usually do not vest, or become available for sale, for at least one year after the grant date.

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As a result, very few customers sold stock in that was also granted in So for , it will report adjusted basis for all shares acquired through options. For and thereafter, it will report unadjusted basis for all option shares.

For shares acquired under employee stock purchase plans, however, Schwab will report unadjusted basis for all shares, regardless of when they were acquired. Intuit, the maker of TurboTax, says employees who use its tax-preparation software will be able to make the correct adjustments through the interview process. Bruce Brumberg, founder of Mystockoptions.

Reporting Sales of Nonqualified Option Stock -

The only times they would not have compensation, and not need to make an adjustment, is if they:. The new reporting requirements do not apply to restricted stock. Employees pay nothing for restricted stock. When it vests, the entire value on the vesting date is treated as compensation and added to their W-2 for that year.