How Do I Report Stock Option Sales on My Tax Return?

by Alia Nikolakopulos, studioD

Stock options that you purchase through an employer are treated and reported differently than traditional stock transactions because there’s a difference between the price you pay for the options and the price of those shares on the open market. Your broker and employer supply you with documents that you must use to report your stock option profits or losses to the Internal Revenue Service. You may not receive all the documents the same year, depending on when you exercise your options or sell your shares. Retain any documents related to the exercise and sale of your stock to ensure you have all information necessary to report your transactions.

Broker Forms

Your broker and employer supply you with documents that you use to report stock option sales to the Internal Revenue Service. Your broker sends you a summary of your stock options at the end of year in which you exercise the options. This document details the fair market value of the shares purchased, the amount you paid for the shares and the number of shares you acquired. Your broker sends Form 1099-B to the IRS in the year that you sell your stock. The difference between the fair market value of the stock and the price you paid per share is taxable income. Your employer reports the difference on Form W-2 in the year you exercise your option.

Tax Forms

You report your stock option sales to the IRS on Schedule D, Capital Gains and Losses, as an attachment to your Form 1040 income tax return. You must use the long Form 1040 to report these transactions because it is the only federal income tax return that supports Schedule D. These forms are available on the website for the current year and the 10 previous tax years.

Report Transaction

Use the information provided on your broker statement to report the acquisition and disposal of your stock options. Your broker may list your acquisition date and disposal date on the statement as the “Trade date.” Report this information on Schedule D as a short-term gain or loss in Part 1, columns B and C. Enter a description of the stock in Part 1, column A. Your description should include the name of the company and number of shares you exercised in the option. List the sales price of your shares in Part 1, column D. The sales price equals the amount for which you sold the shares, minus any broker fees and commissions related to the sale.

Calculate Gain or Loss

Your gain or loss on the sale of your stock options is determined by calculating your basis in the shares and subtracting the result from the amount for which you sell your stock. "Basis" represents your investment in the stock and includes the amount you paid for the optioned shares, plus any taxable compensation you received when you exercised the option. This information is found on your broker and employer tax documents. Report the sum of these figures on Schedule D, Part 1, column E. Subtract column E from column D and report the result in Part 1, column F. If the result is a positive figure, you have a gain from the sale of your stock; if the result is a negative figure, you have a loss from the sale.

About the Author

With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.