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Investment Planning |
Selling Company Stock
If you work for a publicly traded company, you may be able to acquire shares of your company's stock either by purchase through an employee stock purchase plan, or by exercising stock options.
A very common and costly mistake sometimes occurs when stock that was acquired -- either through the exercise of options or through an employee stock purchase plan -- is eventually sold. The error happens when an employee forgets to include his entire cost basis when calculating his capital gain on the sale of stock. You report a stock sale on your tax return by completing Schedule D of Form 1040. To avoid this mistake, remember to include the stock's entire cost basis, including the amount you've paid for the shares outright and anything that's been included in your W-2.
If you're selling shares of company stock acquired through an option exercise, the stock's basis should include the price you paid (the strike price) plus the amount that was included in your W-2. This is important because when the shares are eventually sold, a higher cost basis means you have a smaller capital gain, and a smaller tax hit. Two stock purchase events will trigger an increase in your W-2 income:
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For employee stock plan purchases, your W-2 income includes the discount on your employee stock purchase (usually 15 percent of the stock's fair market value). Check with your company to find out if they've included the discount in your income in the year of purchase or the year of sale.
For non-qualified stock option exercises, or disqualifying dispositions of incentive stock options, the difference between the fair market value and the strike price will also be included in your W-2.
Note that when you sell incentive stock options that meet the long-term holding period, no additional income will be included in your W-2. Your cost basis for regular tax purposes will be the strike price. You may also have AMT tax consequences on qualified dispositions of incentive stock options.
Keep a spreadsheet inventory of your employee stock purchase shares and your stock options. The spreadsheet should include the grant date, purchase or exercise date, any income included in your W-2, and the sale date. This will help you monitor the cost of each share, ensuring that you pay only the minimum amount of taxes due on the eventual sale.
Tips Disclaimer
These tips contain information that may change over time as a result of new tax legislation. Although we make efforts to keep this information current, you should check with your tax advisor before taking action based upon any information contained in these tips.