How to Report a Cashless Exercise on Schedule D
When employees exercise their stock options, it creates a cashless event that needs to be reported on Internal Revenue Service Form Schedule D. The simultaneous purchase and sale of company stock may result in income that is categorized as compensation on the employee’s W-2. You must report the same-day transaction on the Schedule D to ensure that only the net amount of the purchase and sale is treated as a capital gain.
Reporting a Cashless Exercise for Money
Start with Form 8949, Part I, Short-Term Capital Gain and Losses, to report the transaction. Check Box A since the transaction was reported with basis. On Line 1, Column A, Description, enter the name of the stock or the stock symbol, and the number of shares you sold. Skip Column B and in Column C, Date Acquired, enter the day you exercised the option in a month, day and year format. In Column D, Date Sold, enter the same date you entered for Column C, Date Acquired. Enter the amount reported in the gross proceeds box on your 1099 to Column E, Sales Price, on Form 8949. This figure is the gross proceeds less any fees or commissions, so you do not have to deduct the commission manually. In Column F, Cost or Other Basis, calculate the amount you paid for the stock by multiplying the cost of the option by the number of shares you exercised. Add that amount to the income reported on your W-2, and enter the total amount in Column E. Skip Column G. Scroll down to Line 2 and enter the column totals there.
Transfer the amounts from Form 8949, Line 2, Columns E and F, to Schedule D, Line 1, Columns E and F. Skip Column G and move to Column H, Gain or Loss, and subtract Column E from Column F and enter that amount in Column G. Use a separate line to report each option that was a cashless exercise. Complete the Schedule D and transfer the total to Line 13 on the 1040. The gain or loss calculated on the Schedule D should be a small amount. If it isn’t, check that you added the amount you paid for the stock to the amount shown on the W-2.
Exceptions for Short-Term Capital Gains
Same-day transactions and stock that is sold less than one year after the option exercise date are taxed as short-term capital gains. Consider waiting one year or more before selling to have the gain treated as a long-term capital gain which carries a smaller tax rate.
2018 Taxes and Income Brackets
The Tax Cuts and Jobs Act keeps most things related to stock options tax in place. However, the tax rates corresponding to the seven income brackets have been reduced.
2017 Taxes and Stock Options
If you're filing in 2017, you'll go by the tax rates that were in place prior to the tax law changes, which means you may see slightly higher taxes on any stock options you exercised during that tax year.
- Internal Revenue Service: Tax Topics Stock Options
- Internal Revenue Service: Schedule D: Capital Gains and Losses
- Internal Revenue Service: Form 8949: Sales and Other Dispositions of Capital Assets
- MyStockOptions.com: How Does Tax Reform Affect Stock Compensation?
- Fairmark.com: Cashless Exercise of ISOs
- The gain or loss calculated on the Schedule D should be a small amount. If it isn’t, check that you added the amount you paid for the stock to the amount shown on the W-2.
- Same-day transactions and stock that is sold less than one year after the option exercise date are taxed as short-term capital gains. Consider waiting one year or more before selling to have the gain treated as a long-term capital gain which carries a smaller tax rate.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.