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Tax questions related to stock options and restricted stock

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Tax questions related to stock options and restricted stock

Postby Feu on Thu Mar 15, 2007 5:27 pm

Hi everyone,

I am getting ready to prepare my tax return and have some questions about Nonqualified Stock Options (NQSO) using a sell-to-cover method and also regarding a Restricted Stock Award.
Perhaps someone here can answer some (or all) of my questions below.
I received great help here two years ago regarding a few tax questions, so thought I would
ask here again.

Restricted Stock Award (I'll abbreviate as RSA)
Say I was awarded 35 shares of RSA.
At the time of 'acceptance, 15 of those 35 shares were withheld to cover my tax obligation.
I then decided to sell the 20 remaining shares.

QUESTIONS related to RSA scenario above:
1) I assume my capital gain on the sale should simply be the gain on just those 20 shares that I actually sold (as opposed to all 35 shares, since 15 of those were withheld to cover my compensation or ordinary income tax)?

2) I would then use the FMV per share (reported at time of sale which was the same day I 'accepted' the grant) as the cost basis (as opposed to using the stock's market value on the date of acceptance as the cost basis) for the capital gain computation?

In other words, on the day of the acceptance, say the market price was $50 per share, but the reported FMV on my statement says $49 per share (this is presumably the stock valuation at the time the award vested a few weeks earlier).
I subsequently sell it for, say, $55.
Is my capital gain (per share) $6 ($55 - $49) as opposed to $5 ($55 - $50)?

Non Qualified Stock Option plan (NQSO)
I did a lot of research, but couldn't find many, if any, examples, of tax treatment of an NQSO combined with a sell to cover exercise:

NQSO Scenario:
My company offered a (Non Qualified) Stock Option Plan (aka NQSO) - I was granted shares and exercised a 'Sell-to-Cover' order in 2006:
[This is when you exercise your stock options to buy shares of your company stock, then sell just enough of the company shares (at the same time) to cover the stock option cost, taxes, and brokerage commissions and fees.]

This method was used in my case (as opposed to selling everything) because there is a required minimum one year holding period for the remaining (resulting) shares before I am allowed to sell them.

I know that the compensation income gets added automatically to my W2 and I then fill out Schedule 1040D (cap. gains and losses).

Regarding capital gains (or losses):
I exercised 92 shares.
This resulted in 77 shares being sold to cover the cost of buying the shares at the grant price (i.e. the cost of exercising the option).
The remaining 15 shares were 'held' (and still are due to a minimum 1 year holding period before I am allowed to sell them).
The taxable gain (compensation income) reported by my employer's brokerage firm is based on the sum of the following two items:
(FMV of 77 shares sold - cost of shares for the 77 shares sold)
(FMV of 15 shares held - cost of shares for the 15 shares held)

QUESTIONS related to NQSO plan described directly above:
3)Regarding capital gains (or losses) reporting (i.e. filling out my Schedule D), with respect to a 'sell to cover' exercise as in my case:
I assume my cost basis and sales price should be based on only the 77 shares that were sold?
Or does it also include the additional 15 shares that were held, meaning I take into account the sales price and cost amounts using 92 shares instead of just the 77 that were sold?
By contrast, the compensation (W2) income IS based on all 92 shares since I earned income on the entire quantity that I exercised, including the shares that were sold to cover the cost of exercising the option.
I guess my 1099-B should confirm (I am not at home at the moment) which number of shares (77 or 92) I should use for the capital gains reporting(?)

4) Regarding determining the values to use for the sales price and cost on Schedule D:
Do I simply use the 'gross proceeds less commissions and fees' from form 1099-B for the 'sales price' (column 'd') and use the FMV (i.e. cost of shares + taxable gain) reported on my stock plan's 'transaction detail' page as the 'cost basis'?
If not, how are these computed?

5) Regarding the cost basis determination for a future sale of the 15 held shares:
After the mandatory 1 year holding period has passed), when I sell the 15 held shares, I assume I should simply use the FMV (as reported on my statement) as my cost basis for that sale, as far as Schedule D concerned?
I just want to confirm that this is indeed correct.

Compensation Income for NQSO = (FMV of stock at time of option exercise - grant price) multiplied by the number of options (shares) exercised.

Thanks in advance for any help!
Sorry for the lengthy details, but I wanted to provide all the necessary information up front.
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