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2004 Tax Year

Keyword: Stock Options

This is archived information that pertains only to the 2004 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

I purchased stock from my employer under an employee stock purchase plan. Now I have received a Form 1099-B from selling it. How do I report this?

If the special holding period requirements are met, generally treat gain or loss from the sale of the stock as capital gain or loss. However, you may have compensation income if:

  • The option price of the stock was below the stock's fair market value at the time the option was granted, or
  • You did not meet the holding period requirement.
  • The holding period requirement is that you must hold the stock for more than 2 years from the time the option is granted to you and for more than 1 year from when the stock was transferred to you. If you do not meet these holding period requirements, there is a disqualifying disposition of the stock. The compensation income that you should report in the year of the disposition is the excess of the fair market value of the stock on the date the stock was transferred to you less the amount paid for the shares.

    If the holding period requirement are met, but the option price is below the fair market value of the stock at the time the option was granted, you report the difference as compensation income (wages) when you sell the stock. Generally, this compensation income is the lesser of the excess of the fair market value of the stock on the date of the disposition less the exercise price OR the excess of the fair market value of the stock at the time the option was granted less the exercise price.

    If your gain is more than the amount you report as compensation income, the remainder is a capital gain reported on Form 1040, Schedule D (PDF). If you sell the stock for less than the amount you paid for it, your loss is a capital loss, and you do not have ordinary income.

    For more information, refer to Publication 525, Taxable and Nontaxable Income, and Publication 551, Basis of Assets.


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