A broad-based stock option plan is a plan that provides the opportunity for at least 50 percent of a company's full-time employees who meet certain established criteria to participate. These plans offer eligible employees the option to purchase company stock, typically at or below current market prices. Tax consequences of broad-based stock options are usually determined once the stock you acquired through the plan is sold.
1. Determine the stock option price per share. Multiply the option price by the number of shares you purchased when you exercised your option. Add any sales charges, commissions or transaction fees that were assessed when you exercised your stock option. The total amount is your cost basis.
2. Determine the amount per share you sold the stock for. Multiply this amount by the number of shares you sold. Subtract the amount of any sales charges, commissions or transaction fees that were assessed when you sold your stock. This is your sales price.
3. Subtract your cost basis from your sales price. If the result is a positive amount, you have a taxable capital gain. If the result is a negative amount, you have a tax-deductible capital loss. Your gain or loss may be short term or long term depending on how long you have owned the stock. Figure your gain or loss on IRS Form 1040, Schedule D, and report the results on Line 13 of IRS Form 1040.
- Keep in mind that if you exercised your stock options at different times you may have paid different prices for your stock. This may affect your cost basis and your holding period.
- A broad-based stock option plan should not be confused with an employee stock option plan, or ESOP, which has different types of tax consequences.
- Certain broad-based stock option plans may have statutory holding periods. If you sell stock you acquired through these plans prior to satisfying the holding period, you may have ordinary income or be subject to the alternative minimum tax.
- National Center for Employee Ownership: ESOPs, Broad-Based Stock Options, and the Stock Market
- Internal Revenue Service: Topic 427 - Stock Options
- Internal Revenue Service: Publication 525 Taxable and Non-Taxable Income
- Internal Revenue Service: Schedule D (pdf)
- Internal Revenue Service: Schedule D Instructions (pdf)
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