A plain-language guide for people who receive stock options or other forms of equity compensation. Bank products and services are offered by BofI Federal Bank. In the usual case, the basis reported by the broker is incorrect because the adjustment for income reported on exercise of the option is omitted. How is the cost basis determined for employee stock options? Should startup employees prefer stock options or increased salaries? A text for financial advisors and other professionals who offer advice on how to handle equity compensation including stock options.
The basis for capital gains from stock shares acquired via Non Statutory Options is the fair market value when you exercise, which will be $50 in your case because you've already paid ordinary income taxes on the spread between that and your $25 strike price.
How do I determine the cost (tax basis) when reporting sales of option stock?
About Us Rate this Website. Acquired Through Stock Options. Stock can be acquired through stock options in various ways: Qualified incentive stock options 2. Non-qualified stock options 3. Exercise of a call option you bought 5. Exercise of a put option you sold The cost basis method for each of these types of options is explained below. Qualified Incentive Stock Option Plans: Incentive stock option plans are "qualified" if they meet the requirements of Internal Revenue Code Section In addition, the stock acquired must be held for at least one year after exercise of the option in order to receive favorable treatment.
Your employer will be able to tell you if the options you have been granted meet these conditions. The tax owed depends on how long the stock was held after exercise of the option: If the stock is held for at least one year after exercise of the option, the gain is a long-term capital gain. The amount of compensation is the fair market value of the stock less the exercise price at the time of exercise of the option.
Non-qualified employee stock option plans: Stock option plans are "non-qualified" if they do not meet the requirements of Internal Revenue Code Section These options are also called "non-statutory. If the fair market value of the option is readily ascertainable i. Determine your initial cost in the stock.
This will be the share price you paid to buy the stock for the first time. Adjust your cost basis by calculating the total option premiums you have collected against the stock. Keep in mind that options which expired previously without being exercised also reduce your basis in the stock. Calculate your profit or loss. If an call option is exercised at a strike price higher than your basis in the stock, you have made a profit. To calculate the profit, you must subtract your basis in the stock from the strike price of the option.
If an option is exercised at a strike price below your cost basis, you have a loss. To calculate the loss, subtract the strike price from your basis in the stock.
Calculate your tax basis. For tax purposes, your basis in a stock also includes all the commissions and fees you incurred during the trade.
What is the cost basis of my investment?
The cost basis of the stock acquired is the exercise price paid for the shares of stock acquired by option (plus any compensation income recognized if there is a disqualifying disposition.) The favorable treatment available for this type of option is that no income is recognized when the options are granted or exercised. Regarding how to how to calculate cost basis for stock sale, you calculate cost basis using the price you paid to exercise the option if both of these are true: The plan was an incentive stock option or statutory stock option. The stock is . From through , brokers had the option of making this adjustment for the employee and reporting the correct cost basis on Form B. Under the new rules, brokers cannot make this adjustment on shares acquired on or after Jan. 1, , through an employee stock option or purchase plan.