tax on foreign exercised stock options

Forum|Forum|2 years ago
March 30, 2024
2 replies
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I am a US citizen resident in USA employed by a foreign entity. I was allotted stock options in 2022 which I exercised in 2023. At the time of exercise, the employer deducted tax based on fair market value and exercise price. My W2 excludes this notional income. Do I need to add this income while filing taxes? Under what category? And how do I report the taxes they deducted before exercising the stock. Note that I have not sold the stock so this is about income tax and not capital gains if that arises on sale, which I know I will have to pay taxes at the time of sale.

Not A Product Question

Best answer by pk12_2

okay -thank you. My company showed me that the taxes in fact were added to the pay slip. I was missing the entry of ESOP also shown in Box 14 in W2. Thank you for your help!

@Tj2008 , thank you for allowing me to be help. If your query has been answered , please accept this answer so the thread will close. You will still be able to add to it

Is there more I can do for you ?

pk12_2

Employee

@Tj2008 , I am missing something here -- are you saying that

(a) if the FMV of the stock at the time of exercising the option was say $10 and your option to buy was guaranteed at $5, your employer included $5 ( the diff between option and FMV) in your W-2 as income and withheld taxes on that ( Fed, State + Fica )

(b) with the same FMV and Option prices, the employer reported the FMV price and included that in W-2 and withheld taxes accordingly

Please help me understand the situation -- my source of confusion is started by " deducted taxes based on FMV and exercise price". Also did they already recognize the option price in an earlier year W-2.

I will circle back once I hear from you

Tj2008Author

None of the above. Nothing is included in the W2. What they did is that on the exercise date if the exercise value is X, then they said that the tax due on this is Y based on my income tax bracket. They asked me to pay the taxes first to the company account then X-Y was deposited to my trading account in the form of shares.

This (X-Y) is not in my W2. It is only listed as an item in the payslip of the month when options were exercised. there is a comment against this entry that says 'do not increase the pay'. So the question is what do I do with X and Y when it comes to filing returns?

pk12_2

Employee

@Tj2008 , what I understand of the situation is that your employer essentially treated the exercise as a bonus / commission / pay-in-kind and withheld taxes . In my view this would still be treated as an addition to wages i.e. this income is caused by your employment and not a gift or other income. This implies the taxes withheld should include Federal + State + FICA. If that interpretation is true, then :

(a) you enter this X ( the FMV / exercise price of the stocks ) as an addition to your W-2 box 1, Box-3 and Box5 plus State earnings Box and (with clarification from the employer ), add the taxes collected into Boxes 2, 4, 6 and into State Taxes collected box.

(b) TurboTax would then compute correctly any taxes due for all the different withholdings.

You would need to keep record of the FMV/ exercise price of the stocks as your basis for the future disposition and capital gain computation.

Does this make sense ?

Tj2008Author

okay -thank you. My company showed me that the taxes in fact were added to the pay slip. I was missing the entry of ESOP also shown in Box 14 in W2. Thank you for your help!