Exercising a NQSO can't be handled by the TurboTax software without over-riding the tax forms and negating electronical filing. This deficiency should be corrected by TurboTax software engineers This should be fixed

Forum|Forum|1 year ago
February 5, 2025
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When you have a non qualified stock option (NQSO) exercised, you get both a 1099-B form from the broker and a W2 from the employer for the same gain taken from the exercise of the stock. Therefore, you are doubly charged taxes inappropriately unless you adjust the basis of the stock sale to be negative on Form 8949. However, for TurboTax Premier 2024, this is not allowable in your step by step instructions- you are NOT permitted to adjust the gain to show a negative number. You can only modify Form 8949 manually by changing your view to Forms and overriding the field on the form 8949- that is, part I (g) "amount of Adjustment". When you override, you can not file your return electronically, which is a key reason that I bought Turbotax Premier. You should at least provide explicit instructions that this override is required but preferably TurboTax software engineers should change the code to allow negative numbers for cost basis on form 8949 for NQSO elections so that you can still file electronically. This seems like deceptive advertisement for Premier, which is touted as being able to handle Personal Investment yet a common situation like NQSO exercise can't be managed through your software.

Best answer by njenear

Don't indicate that it is an Employee Stock Sale, just enter as a regular stock sale with the correct amount as an Adjusted Cost Basis.

This would be what you paid for the stock (which could be $0), plus the discount you received that you were taxed on your W-2. It would not be a negative number. Most likely, there would be a small Capital Gain or Loss.

Here's more info on RSU's and Taxes.

@ITTGus

@njenear

No, that's not correct- you also don't understand the issue, but thanks for trying. This is not a regular stock sale.

The lack of sound financial advice from TurboTax impelled me to dig deeper and I found a way to make Turbotax accept NQSO same day cashless sales correctly and be able to file electronically. What you need to do is to chose NQSO but adjust the cost basis. So as you enter or review each NQSO sale, under box 1e (Cost basis), choose "the cost basis reported is incorrect or missing on my 1099-B" and hit continue. In the next screen, choose "I found my adjusted cost basis" and enter the adjusted basis as this example explains:

Example for a Non-Qualified Stock Option:

Say it's worth $10. And your exercise cost is $1. You perform a same-day exercise and sale. You made $9.

This $9 is taxed as wages and will show up on your W-2.

Since there was a stock sale, it ALSO shows up on your 1099-B as a $9 gain.

A $9 gain in two places could lead to a maximum tax rate of over 100% if reported twice.

In this situation, the cost basis needs to be ADJUSTED up from $1 to $10. An adjustment of $9 since you're already getting taxed on that amount as wage income

This example is taken from the method described at this URL:

https://www.modernfp.com/blog/doubletax#:~:text=Example%20for%20a%20Non%2DQualified%20Stock%20Option%3A&text=You%20made%20%249.,over%20100%25%20if%20reported%20twice.

I tried it and form 8949 computes perfectly, showing a loss equal to the ordinary income reported on my W2. I had literally tried the 'manual override' on this form 8949 first and was all ready to file by mail when I thought I'd try one more internet search and came up with this method. I'd saved my 'mailed' forms (manual override) and compared them to the forms generated using this method and they were identical. So problem solved!

None of TurboTax 'experts' understand the issue. They should hire me as a consultant. Jeez, this was a huge draw on my time. At least now I'm filed electronically! For those of you struggling w/ Turbotax 2024's poor handling of cashless NQSOs, THIS is the solution!

ThomasM125

Your W-2 and your Form 1099-B should not report the same gain on the sale of your non-qualified stock options, but often the cost basis reported on the Form 1099-B will be wrong when stock options are involved. In this instance, there is an option to adjust the cost basis reported on the Form 1099-B when you enter the form in TurboTax. It will say "the cost basis is incorrect or missing on my Form 1099-B". You may need to indicate that you are reporting employee stock and that you are entering your sales one by one to see that option. Once you make your cost basis adjustment, it will flow down to form 8949 where your capital gain is reported.

By exercising a non-qualifying stock option, I assume you mean you acquired stock in your company at a discount and it was a non-qualifying stock option as opposed to an incentive stock option. As such, the acquisition of the stock (exercise of the option) would only result in the addition of ordinary income to your wages as reported in box 1 of your W-2, for an amount equal to the discount you received on the purchase of the stock.

As such, there would be no stock sale as reported on a Form 1099-B upon exercise of the option. Since you mention a Form 1099-B was generated I assume there was a sale of stock as well. This may have been initiated by you or the company may have sold some shares to pay into your income tax withholding as reported in box 2 on your W-2 form.

In either case, the cost basis reported on the Form 1099-B may be incorrect and if so it would need to be adjusted. The correct cost basis would be what you paid for the shares that were sold plus the discount reported on your W-2 form in box 1 that is associated with the shares that were sold. This should not result in a negative cost basis to be reported.

The difference between the proceeds reported on the Form 1099-B and what you paid for the shares sold would be your total profit on the sale. The capital gain would be that profit minus the discount reported on your W-2 form.

I suggest you determine how many shares you acquired when you exercised your stock options and divide your discount (reported in box 1 on your W-2) by that number. That will give you the discount per share. Next determine what the shares that you acquired cost (number of shares times the price you paid) and divide that by the number of shares acquired to get the cost of each share. Then, when you enter your Form 1099-B, the correct cost to enter will be the cost per share plus the discount per share times the number of shares sold. You may have received form 3922 reporting the stock acquisition and you can use that to get the numbers necessary for the calculations.

[Edited 2/6/2025 at 9:02 AM PST]

@njenear

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njenearAuthor

This is a NQSO where the stock is granted to an employee at a set price (usually the going price of the stock at the grant date but sometimes at a discount) and the employee can exercise the stock at a time of his/her choosing in the future, with the future usually limited to within X number of years. The idea is to incentivize employees to work hard and bring the stock price up, therefore making it worthwhile to exercise the option at some future date at a higher price per share than the price when the option was granted. If the price falls below the grant price, well, no sense in exercising it. When exercised, it is done as a 'cashless' sale- it is a short term gain reported on a 1099-B AND on the W2 as ordinary income. The employee reaps the benefit of the grant price (say 200 shares at $50/share) vs the future sale price (say $75/share). You absolutely are given both a W2 for the gain- in my example ($75-50)*200 = $5000 gain minus any taxes taken out on the W2. The brokerage absolutely ALWAYS reports this cashless sale on a 1099-B while the employer reports the gain on the employee's W2 as ordinary income. I literally have many years where this is the case. Turbotax used to handle this case seamlessly but obviously the institutional knowledge has been lost since the only way it can be handled now is to do an overide on the Form 8949, specifically Part I (g), to show a negative number. Otherwise, Turbotax will count BOTH the gain reported on the W2 and on the 1099-B, vastly inflating the taxes due. Please listen to what I am saying as likely I've used Turbotax longer than you and am very familiar with cashless exercises, having done many over my 35+ year career. Its only been since about 2022 that Turbotax has FAILED with cashless exercises of NQSO and required the override, therefore eliminating the ability of file electronically and violating truth in advertising. Please fix this obvious mistake in the software code. It should be easy to do as you used to account for such sales.

ThomasM125

When you report your Form 1099-B in TurboTax, you will see an option to adjust the cost basis if it is reported wrong on the Form 1099-B. You may need to indicate that you are reporting a sale of employee stock and choose the "enter one sale at a time" option to see the notice. That will prevent you from having to make an entry on form 8949.

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AlanMeyer

I am having the same problem. I downloaded the 1099-B for the same day NQSO sale, but am unable to access it in TurboTax to indicate that the sale was also reported as income on a W-2. The page showing the sale details isn't appearing correctly (a portion showing "needs review" is clipped off) and when I hit continue, it takes me back to the investment income page. I will try your work around, but this is a flaw in the 2024 edition of TurboTax that wasn't in previous versions.