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March 31, 2024
Question

ISO taxed on W-2 not on 1099-B but should I add it

  • March 31, 2024
  • 1 reply
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I cashed out some ISO stock and received a 1099-B not showing the taxes that I paid. My employer says they reported the federal and state withholding as part of my W-2 though it is not clear. Tax is not reported as withheld on the 1099-B. Also they took out social security, medicare, and local taxes as well on my W-2 for the sale which I don't think they were supposed to. Do I report the federal and state tax again as part of my 1099-B in TurboTax? My taxes skyrocketed when I entered the small amount I cashed out. Thank you for any assistance

    1 reply

    March 31, 2024

    What do you mean by "cashed out"?  Did you "exercise and sell" Incentive Stock Options (ISOs)?  Or did you sell stock you acquired from the exercise of ISOs after holding the stock for a while?  If the latter, how long did you hold the stock?  

     

    If you exercised your options and sold those shares within the same calendar year it was a disqualifying sale.  With a disqualifying sale the bargain element (the difference between the exercise price and the market price on the day you exercised the options and purchased the stock) is ordinary income and should be included in box 1 of Form W-2.  Your cost basis in the shares sold is the exercise price plus the bargain element, which is the amount that was added to your W-2 and subject to ordinary income tax.  If you did an exercise and sale at the same time, you very likely have a stock sale where the cost basis and the proceeds are the exact same amount.  However, if the transactions occurred on the same day, your proceeds could differ slightly from your cost basis due to market fluctuations.  

     

    If your employer did not include the bargain element in Box 1 of Form W-2, you will need to add it to your tax return as Other Income.  The TurboTax interview for Incentive Stock Optioins will guide you through this.

     

    It is unlikely that your Form 1099-B reflects the accurate cost basis for the shares sold.  If that is the case, you will need to adjust the cost basis.  If the sale is reported as a Category B - Basis wasn't reported to the IRS you can just enter the correct cost basis.  If it was reported as a Category A - Basis was reported to the IRS, you will have to first enter the cost per the 1099-B, and then enter the correct cost as an adjustment later in the entry process.  

     

    ISO Disqualifying dispositions are not subject to Social Security and Medicare tax.  

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