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I have shares of a company I got from exercising before the company went public. Some shares I've held for less than a year, some for more. I exercised all the options after holding them for a year.

I transferred them to a brokerage, but they don't have any cost basis or lot information; they're all the same as far as the brokerage is concerned.

If I sell the shares I've held for over a year and report it correctly, will I get long-term capital gains, or is there a reporting or bookkeeping requirement on the brokerage's end that will cause a problem?

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    (1) If you have accurate records (kept 3 years after filing in case of audit) that's enough to get long-term treatment (2) Every broker I' know will let you provide them the basis&holding info, which they will then report and your return prep becomes simpler, especially if you use software or a preparer that imports the broker's 1099B. Also the broker website (or at least statment) probably will show unrealized gain/loss using this info, which may be helpful when you are choosing which and when to sell. – dave_thompson_085 May 6 '18 at 14:52
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    @dave_thompson_085 Please don't answer questions in comments. Comments are transient and should be used to ask questions or suggest changes to the question. – Brythan May 6 '18 at 19:56
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In my experience, brokerages aren't required to provide cost basis for ISOs or other employer-provided stock grants. I've always had to manually calculate the cost basis based on the date of acquisition (which should be provided) and determine if the gains/losses are short- or long-term based on the date of sale(s). This has never been a problem for me, even though the brokerage does not show a cost basis on the forms sent to the IRS.

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From TurboTax

Incentive Stock Option transactions fall into five possible categories, each of which may get taxed a little differently. With an ISO, you can:

Exercise your option to purchase the shares and hold them. Exercise your option to purchase the shares, then sell them any time within the same year. Exercise your option to purchase the shares and sell them after less than 12 months, but during the following calendar year. Sell shares at least one year and a day after you purchased them, but less than two years since your original grant date. Sell shares at least one year and a day after you purchased them, and at least two years since the original grant date. Each transaction has different tax implications. The first and last are the most favorable. The time at which you sell determines how the proceeds are taxed.

If you can wait at least a year and a day after you purchase the stocks, and at least two years after you were granted the option to sell the stocks (as described in item 5 above), any profit on the sale is treated as a long-term capital gain, so it is taxed at a lower rate than your regular income. (Your profit is the difference between the bargain price you pay for the stock, and the market price that you sell it for.) This is the most favorable tax treatment because long-term capital gains recognized in 2018 are taxed at a maximum 23.8 percent (or 0 percent if you're in the 10 percent or 15 percent income tax brackets) compared to ordinary income tax rates which may be as high as 37 percent. After 2018 tax rates may change depending on what Congress does.

Sales that meet these one- and two-year time limits are called "qualifying dispositions," because they qualify for favorable tax treatment. No compensation is reported to you on your Form W-2, so you do not have to pay taxes on the transaction as ordinary income at your regular tax rate. Category 5 is also a qualifying disposition.

Now if you sell the shares before they meet the criteria for favorable capital gains treatment, the sales are considered "disqualifying dispositions," and you may end up paying taxes on part of the proceeds of the sale at your ordinary income tax rate, which in 2018 could be as high as 37 percent.

When you sell the stock two years or less from the offering date, known as the "grant date," the transaction is a disqualifying disposition. Or if you sell the shares one year or less from the "exercise date," which is when you purchase the stock, that is also considered a disqualifying disposition. In both cases, the compensation should be reported on your Form W-2. The amount reported is the bargain element, which is the difference between what you paid for the stock and its fair market value on the day you bought it. But if your bargain element is more than your actual gain from the sale of the stock, then you report as compensation the amount of the actual gain. The reported compensation is taxed as ordinary income. (Categories 2, 3 and 4 noted above are disqualifying dispositions.)

  1. Exercise your option to purchase the shares and hold them

Grant date
12/31/2017

Exercise date 6/30/2018

Exercise price $25

Sale date
Not sold yet

Market price on 6/30/2018 $45

Number of shares 100

Bargain element $2,000

You do not report anything on your 2018 Schedule D (Capital Gains and Losses) because you have not yet sold the stock. Your employer will not include any compensation related to your options on your 2018 Form W-2 either.

But you will have to make an adjustment for the Alternative Minimum Tax (AMT) that equals the bargain element, which is $2,000 ($45 - $25 = $20 x 100 shares = $2,000). Report this amount on your 2018 Form 6251: Alternative Minimum Tax, line 14.

  1. Exercise your option to purchase the shares, and then sell those shares within the same calendar year

Grant date 12/31/2017

Exercise date 06/30/2018

Exercise price $20

Sale date 06/30/2018

Sale price $45

Number of shares 100

Bargain element $2,500

The bargain element is the difference between the exercise price and the market price on the day you exercised the options and purchased the stock ($45 - $20 = $25 x 100 shares = $2,500). This amount should already be included in the total wages reported in Box 1 of your 2018 Form W-2 because this is a disqualifying sale (meaning you are disqualified from taking it as a capital gain and being taxed at the lower capital gains rate because you sold the shares less than a year after exercising the option). If this amount is not included in Box 1 of Form W-2, add it to the amount you're reporting on your 2018 Form 1040, line 7.

Report the sale on your 2018 Schedule D, Part I as a short-term sale. The sale is short-term because not more than one year passed between the date you acquired the actual stock and the date you sold it. For reporting purposes on Schedule D:

The date acquired is 6/30/2018 The date sold is also 6/30/2018 The cost basis is $4,500.This is the actual price paid per share times the number of shares ($20 x 100 = $2,000), plus any amounts reported as compensation income on your 2018 tax return ($2,500) The sales price is $4,500 ($45 x 100 shares). This should match the gross amount shown on your 2018 Form 1099-B you receive from your broker after the end of the year. You end up reporting no gain or loss on the stock sale transaction itself, but the $2,500 overall profit will be taxed at your ordinary tax rate. Because you exercised the options and sold the stock in the same year, you do not need to make an adjustment for Alternative Minimum Tax purposes.

  1. Sell shares in the next calendar year, but less than 12 months after you purchased them

Grant date
12/31/2015

Exercise date 12/31/2017

Exercise price $20

Market price on 12/31/2016 $45

Sale date 06/15/2018

Sale price $30

Number of shares 100

Bargain element $2,500

Actual gain from sale $1,000

Unlike the previous example, the compensation is calculated as the lesser of the bargain element or the actual gain from the sale of the stock, because the market price on the day of the sale is less than that on the day you exercised your option.

The bargain element, that is, the difference between the exercise price and the market price on the day you exercised the options and purchased the stock ($45 - $20 = $25 x 100 shares = $2,500) The actual gain on the sale of the stock ($30 - $20 = $10 x 100 shares = $1,000). In this example, the amount that is considered compensation is limited to $1,000, your actual gain when you sell the shares, even though your bargain element ($2,500) is higher. The $1,000 may be included in the total wages shown in Box 1 of your 2018 Form W-2 from your employer because this is a disqualifying sale, meaning that it does not qualify for treatment as a capital gain (at the lower capital gains rates). If the $1,000 amount is not included in Box 1 of your 2018 Form W-2, you must still add it to the amount you're reporting as compensation income on line 7 of your 2018 Form 1040.

In order to be taxed only on the lesser of the two calculations, ($2,500 vs. $1,000 in our example), the sale cannot be any of the following:

A wash sale: if you repurchase shares in the same company (such as through an employee stock purchase plan) within 30 days before or after the sale of the shares obtained from the exercise of the option, some or all of the sale will be considered a wash sale. You will not be allowed to report the lesser calculation as income for shares sold in a wash sale. You must report the full $2,500 as income. A sale to a related party: If you sell the shares to a related party (a member of your family, or a partnership or corporation in which you have more than a 50 percent interest), you must report the full $2,500 as income. A gift: If you gave the stock to an individual or a charity, rather than selling the shares, you must report the full $2,500 as income. Report the sale on your 2018 Schedule D, Part I, as a short-term sale. It's considered short-term because less than one year passed between the date you acquired the stock and the date you sold it. For reporting purposes on Schedule D:

The date acquired is 12/31/2017 The date sold is 6/15/2018 The sales price is $3,000. This is the price at the date of sale ($30) times the number of shares sold (100). This amount should be reported as the gross amount on the 2018 Form 1099-B that you'll receive from the broker that handled the sale. The cost basis is $3,000. This is the actual price paid per share times the number of shares ($20 x 100 = $2,000) plus the compensation amount reported on your 2018 Form 1040 ($1,000). The resulting gain is zero. Because this sale did not occur in the same year as the year you exercised the options, you have to make an adjustment for AMT. When you originally purchased the stock, you should have reported an income adjustment for AMT purposes in that year. Find out if this was the case by looking at Form 6251 (Alternative Minimum Tax) for the year that you purchased the shares. In our example, the amount that should have been reported on your 2018 Form 6251 was the bargain element ($45 - $20 = $25) times the number of shares (100), which equals $2,500.

So what do you do in 2018? We explain what you need to do in our section on Reporting an Incentive Stock Option Adjustment for the Alternative Minimum Tax below.

  1. Sell shares at least one year and a day after you purchase, but less than two years after the grant date

Grant date 08/01/2016

Exercise date 02/01/2017

Grant price $20

Market price on 02/01/2017 $45

Sale date 06/15/2018

Sale price $85

Commissions paid at sale $10

Number of shares 100

Bargain element $2,500

Net gain $3,990

The bargain element is calculated as the difference between the exercise price and the market price on the day you exercised the options and purchased the stock ($45 - $20 = $25 x 100 shares = $2,500). This amount should be included in the total wages shown in Box 1 of the 2018 Form W-2 from your employer because this is a disqualifying sale (meaning that your gain does not qualify for capital gains treatment for which the rates are lower than for ordinary income in 2018). If this amount is not included in Box 1 of Form W-2, you still must add it to the amount of compensation income that you report on your 2018 Form 1040, line 7.

You also must report the sale of the stock on your 2018 Schedule D, Part II as a long-term sale. It is long term because more than one year passed between the date you acquired the stock and the date you sold it. For reporting purposes on Schedule D:

The date acquired is 02/01/2017 The date sold is 6/15/2018 The sales price is $8,490. This is the price at the date of sale ($85) times the number of shares sold (100), or $8,500. We then subtract the commissions paid on the sale (in this example $10), resulting in $8,490. This amount should be reported as the gross amount on the 2018 Form 1099-B that you'll receive from the broker that handled the sale. The cost basis is $4,500. This is the actual price paid per share times the number of shares ($20 x 100 = $2,000) plus the compensation income reported on your 2018 Form 1040 ($2,500). The resulting gain is $3,990 ($8,490 - $4,500 = $3,990). Because this sale did not occur in the same year as the year you exercised the options, you have to make an adjustment for AMT. When you originally purchased the stock, you should have reported an income adjustment for AMT purposes in that year. Find out if this was the case by looking at Form 6251 (Alternative Minimum Tax) for the year that you purchased the shares. In our example, the amount that should have been reported on your 2018 Form 6251 was the bargain element ($45 - $20 = $25) times the number of shares (100), which equals $2,500. So what do you do this year? You will have to report another adjustment on your 2018 Form 6251. We explain how you calculate your AMT adjustment in the section called Reporting an Incentive Stock Option Adjustment for the Alternative Minimum Tax below.

  1. Sell shares at least one year and a day after you purchase and at least two years after the grant date

Grant date
01/01/2015

Exercise date 02/01/2016

Grant price $20

Market price on 02/01/2016 $45

Sale date 06/15/2018

Sale price $85

Commissions paid at sale $10

Number of shares 100

This sale is a qualifying sale, because more than two years passed between the grant date and the sale date, and more than one year passed between the exercise date and the sales date. Because this is a qualifying sale, the 2018 Form W-2 you receive from your employer will not report any compensation amount for this sale.

Report the sale on your 2018 Schedule D, Part II as a long-term sale. It is long-term because more than one year passed between the date you acquired the stock and the date you sold it. For reporting purposes on Schedule D:

The date acquired is 02/01/2017 The date sold is 06/15/2018 The sale price is $8,490. This is the price at the date of sale ($85) times the number of shares sold (100), or $8,500. We then subtract any commissions paid on the sale (in this example $10), resulting in $8,490. This amount should be reported as the gross amount on the 2018 Form 1099-B that you'll receive from the broker that handled the sale. The cost basis is $2,000. This is the actual price paid per share times the number of shares ($20 x 100 = $2,000). The long-term gain is the difference of $6,490 ($8,490 - $2,000 = $6,490). Because this sale and the exercise of the options didn't occur in the same year, you must make an adjustment for AMT. When you originally purchased the stock, you should have reported an income adjustment for AMT purposes in that year. Find out if this was the case by looking at Form 6251 (Alternative Minimum Tax) for the year that you purchased the shares. In our example, the amount that should have been reported on your 2018 Form 6251 was the bargain element ($45 - $20 = $25) times the number of shares (100), which equals $2,500. So what do you do this year? We'll explain how you calculate your AMT adjustment in the section below.

Reporting an Incentive Stock Option adjustment for the Alternative Minimum Tax

If you buy and hold, you will report the bargain element as income for Alternative Minimum Tax purposes. Report this amount on Form 6251: Alternative Minimum Tax for the year you exercise the ISOs.

And when you sell the stock in a later year, you must report another adjustment on your Form 6251 for the year of sale. But what is the adjustment you should report? The year-of-sale Form 6251 adjustment is added to the stock's cost basis for Alternative Minimum Tax purposes (but not for regular tax purposes).

So, in example 5, rather than using a cost basis of $2,000 for AMT, a cost basis of $4,500 ($2,000 plus $2,500 of the AMT adjustment from the year of exercise) should be used. This results in a $3,990 gain for AMT purposes from the sale, which differs from the regular tax gain of $6,490 by exactly $2,500. This is all pretty complicated and is better left to tax preparation software like TurboTax.

Unused AMT credits

In the year that you exercise an Incentive Stock Option, the difference between the market value of the stock on the exercise date and the exercise price counts as income under the AMT rules, which can trigger an AMT liability. However, you will also generally earn an AMT credit in that year. You can use the credit to lower your tax bill in later years. However, there are limitations on when you can use an AMT credit. In some cases, AMT credits cannot be used for several years. Fortunately, a taxpayer-friendly change in 2008 allows individuals with unused AMT credits that are over three years old (so-called long-term unused AMT credits) to cash them in. For the 2018 tax year, long-term unused AMT credits are those that were earned in pre-2007 years. Taxpayers with long-term unused credits from pre-2007 years can generally collect at least half their credit amounts by filing their 2018 returns, and the remainder can be collected by filing their 2018 returns. To figure the amount of unused AMT credits that can be collected under this rule, fill out Form 8801 (Credit for Prior Year Minimum Tax).

Consider the entire picture

It is important to take a look at the whole picture of your capital gains and losses for AMT purposes when you sell stock that you purchased by exercising Incentive Stock Options. If the market turns on you after you have exercised your options and the current value of your stock is now less than what you paid, you could still be subject to the Alternative Minimum Tax. One way around that is to sell the stock in the same year that you bought it, creating a "disqualifying" disposition. That way you will not be subject to the AMT, but you would be subject to regular tax on the difference between your option exercise price and the sales price.

For example, assume you exercised options at $3 a share on a day when the stock was selling for $33, and the stock value later dropped to $25. If you sell the stock at $25 before the end of the year, you would be taxed at ordinary income tax rates on $22 per share ($25-$3) and not be subject to any AMT concerns. But if you hold onto the stock, you would be taxed for AMT purposes in the year you exercised the option on the phantom profit of $30 a share—the difference between your option exercise price and market price on the day you bought the shares--even if the actual market price of your shares fell after that date. It may be advisable to consult with a tax professional prior to making any transactions that involve ISO shares.

TurboTax Premier Edition provides extra help with investments, so you can track and calculate your gains and losses—and TurboTax calculations are guaranteed accurate.

A word of caution

Your employer is not required to withhold income tax when you exercise an Incentive Stock Option since there is no tax due (under the regular tax system) until you sell the stock. Although no tax is withheld when you exercise an ISO, tax may be due later when you sell the stock, as illustrated by the examples in this article. Be sure to plan for the tax consequences when you consider the consequences of selling the stock.

For additional information, see IRS Publication 550: Investment Income and Expenses (Including Capital Gains and Losses) and Stock Options in IRS Publication 525: Taxable and Nontaxable Income.

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    I downvoted because it's a wall of text that's presumably copied and pasted from TurboTax. If you can briefly summarize the parts that are relevant to the question I will remove the downvote. – D Stanley Feb 25 at 19:00
  • @DStanley whatever makes you happy – FrankRizzo Feb 25 at 19:26

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