Stock options double taxation

Posted: irenich Date: 30.05.2017

Buying discounted shares in your company through an employee stock purchase plan can be a great investment , but figuring out the tax when you sell is never easy. I discussed this new rule, which also applies to employee stock option plans, in a column last month http: Cost basis is generally what you pay for a stock.

In a normal stock sale, you subtract your cost basis from your proceeds and report the difference as a capital gain or loss on Schedule D of your tax return. The gain is short- or long-term, depending on how long you held the shares. Short-term gains are taxed at the same rate as ordinary income from a job. Long-term gains, on securities held for at least a year, are taxed at a lower rate. However, when you sell shares acquired through an employee stock plan, at least some of your profit is considered compensation and taxed as ordinary income, no matter how long you held the shares.

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The compensation component will be lumped in with your wages and reported in Box 1 of your W-2 form in the year you sell the stock. If it is not shown in Box 14, you will have to use information on Form , also from your employer, to figure it out. This compensation is not deducted from the sales proceeds on the Form B you get from your broker.

Unless you make an adjustment when filing your taxes, you will pay tax twice on the compensation. From through , brokers had the option of making this adjustment for the employee and reporting the correct cost basis on Form B.

Double Taxation

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.

stock options double taxation

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.

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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.

A typical discount is 10 or 15 percent. Your plan runs from Jan.

You can purchase stock at a 15 percent discount to the market price on either date, whichever is lower. In column f , use code B, which means the basis is incorrect. No adjustment is necessary on Form Kathleen Pender is a San Francisco Chronicle columnist.

Net Worth runs Tuesdays, Thursdays and Sundays. To get the biggest tax break, hold stock purchased through employee stock purchase plans for at least two years from the offering date and at least one year from the purchase date. Even if you hold stock long enough to get this tax break, some of your profit will be taxed as ordinary income.

stock options double taxation

The tax basis reported on Form B will probably be incorrect under new IRS rules that brokers must follow. Even if you sell all your stock immediately and all the income is included in your W-2, you still must report the sale on Form and Schedule D.

What type of entity should I form?

Autos Jobs Real Estate e-edition Subscribe Sign In. How to avoid getting double-taxed on employee stock purchase plan By Kathleen Pender February 13, Updated: February 17, People who sold stock last year acquired through an employee stock purchase plan might need to make an adjustment on their federal tax return to avoid overpaying taxes.

People who sold stock last year acquired through an employee stock Kathleen Pender Business Columnist. Load more in Section.

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