ISO Sales: How to Avoid Paying Tax Twice on the Same Income
🚨For anyone with employer stock options - The most common mistake on tax returns isn't a missed form. It's paying tax TWICE on the same income. 💸 💸 The cost basis rule for ISO sales depends entirely on which type of disposition you have. ✅ Qualifying disposition (held 2+ years from grant AND 1+ year from exercise): 🔹 Cost Basis = exercise price paid 🔹 Full gain above basis = long-term capital gain 🔹 No ordinary income at sale ⚠️Disqualifying disposition (sold within 2 years of grant OR within 1 year of exercise): 🔹 Bargain element at exercise (FMV − strike) becomes ordinary income on your W-2 🔹 Cost Basis = exercise price paid + ordinary income reported as wages 🔹Anything above that cost basis is gain and below is loss 🪤The trap most people fall into: 🔹 Form 1099-B shows only the exercise price as basis 🔹 IRS rules prohibit brokers from including the W-2 compensation piece 🔹 Without an adjustment, you'll pay tax twice - once as wages, again at capital-gain rates 🔧The fix: Form 8949, column (f), adjustment code "B" 📚Source: IRS Pub 525, Stock Options section, https://lnkd.in/gqx76kPB 🎯Before you sign your return: pull your broker's supplemental statement and reconcile the basis against your W-2. Most tax software gets it right — if you tell it the broker basis is wrong.
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