Page 35 - Virtual Currencies

8:29 - 7-Feb-2023
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Fileid: … tions/p525/2022/a/xml/cycle08/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
choosing to include the value of property in your you generally recognize compensation income Grant of option. If you receive a statutory
income for the year of the transfer doesn't apply at the time and in the amount of the reduction. stock option, don't include any amount in your
to a nonstatutory option. income when the option is granted.
Option without readily determinable Tax form. If you have income from the exer- Exercise of option. If you exercise a statutory
cise of nonstatutory stock options, your em-
value. If the FMV of the option isn't readily de- ployer should report the amount to you in stock option, don't include any amount in in-
terminable at the time it's granted to you (even if box 12 of Form W-2 with code V. The employer come when you exercise the option.
it's determined later), you don't have income should show the spread (that is, the FMV of
until you exercise or transfer the option. stock over the exercise price of options granted Alternative minimum tax (AMT). For the
to you for that stock) from your exercise of the AMT, you must treat stock acquired through the
nonstatutory stock options. Your employer exercise of an ISO as if no special treatment ap-
Exercise or transfer of option. When you ex- should include this amount in boxes 1, 3 (up to plied. This means that, when your rights in the
ercise a nonstatutory stock option, the amount the social security wage base), and 5. Your em- stock are transferable or no longer subject to a
to include in your income depends on whether ployer should include this amount in box 14 if substantial risk of forfeiture, you must include
the option had a readily determinable value. it's a railroad employer. as an adjustment in figuring alternative mini-
Option with readily determinable value. If you're a nonemployee spouse and you ex- mum taxable income the amount by which the
FMV of the stock exceeds the option price. En-
When you exercise a nonstatutory stock option ercise nonstatutory stock options you received ter this adjustment on line 2i of Form 6251. In-
that had a readily determinable value at the time incident to a divorce, the income is reported to crease your AMT basis in any stock you acquire
the option was granted, you don't have to in- you in box 3 of Form 1099-MISC. by exercising the ISO by the amount of the ad-
clude any amount in income. Sale of the stock. There are no special in- justment. However, no adjustment is required if
Option without readily determinable come rules for the sale of stock acquired you dispose of the stock in the same year you
value. When you exercise a nonstatutory through the exercise of a nonstatutory stock op- exercise the option.
stock option that didn't have a readily determi- tion. Report the sale as explained in the Instruc- See Restricted Property, later, for more in-
nable value at the time the option was granted, tions for Schedule D (Form 1040) for the year of formation.
the restricted property rules apply to the prop- the sale. You may receive a Form 1099-B re- Your AMT basis in stock acquired
erty received. The amount to include in your in- porting the sales proceeds. through an ISO is likely to differ from
come is the difference between the amount you Your basis in the property you acquire under your regular tax basis. Therefore, keep
RECORDS
pay for the property and its FMV when it be- the option is the amount you pay for it plus any adequate records for both the AMT and regular
comes substantially vested. If it isn't substan- amount you included in income upon grant or tax so that you can figure your adjusted gain or
tially vested at the time you exercise this non- exercise of the option. loss.
statutory stock option (so that you may have to Your holding period begins as of the date
give the stock back), you don't have to include you acquired the option, if it had a readily deter-
any amount in income. You include the differ- minable value, or as of the date you exercised Example 7. Your employer, Elm Company,
ence in income when the option becomes sub- or transferred the option if it had no readily de- granted you an ISO on April 8, 2021, to buy 100
stantially vested. For more information on re- terminable value. shares of Elm Company at $9 a share, its FMV
stricted property, see Restricted Property, later. For options granted on or after January 1, at the time. You exercised the option on Janu-
ary 7, 2022, when the stock was selling on the
Transfer in arm's-length transaction. If 2014, the basis information reported to you on open market for $14 a share. On January 27,
you transfer a nonstatutory stock option without Form 1099-B won't reflect any amount you in- 2022, when the stock was selling on the open
a readily determinable value in an arm's-length cluded in income upon grant or exercise of the market for $16 a share, your rights to the stock
transaction to an unrelated person, you must in- option. For options granted before January 1, first became transferable. You include $700
clude in your income the money or other prop- 2014, any basis information reported to you on ($1,600 value when your rights first became
erty you received for the transfer as if you had Form 1099-B may or may not reflect any transferable minus $900 option price) as an ad-
exercised the option. amount you included in income upon grant or justment on Form 6251, line 2i.
Transfer in non-arm's-length transac- exercise; therefore, the basis may need to be If you exercise an ISO during 2022, you
adjusted.
tion. If you transfer a nonstatutory stock option TIP should receive Form 3921, or a state-
without a readily determinable value in a It’s your responsibility to make any ap- ment, from the corporation for each
non-arm's-length transaction (for example, a ! propriate adjustments to the basis in- transfer made during 2022. The corporation
gift), the option isn't treated as exercised or CAUTION formation reported on Form 1099-B by must send or provide you with the form by Janu-
closed at that time. You must include in your in- completing Form 8949. ary 31, 2023. Keep this information for your re-
come, as compensation, any money or property cords.
received. When the transferee exercises the Statutory Stock Options
option, you must include in your income, as Sale of the stock. You have taxable income
compensation, the excess of the FMV of the There are two kinds of statutory stock options. or a deductible loss when you sell the stock that
stock acquired by the transferee over the sum • Incentive stock options (ISOs). you bought by exercising the option. Your in-
of the exercise price paid and any amount you • Options granted under employee stock come or loss is the difference between the
included in income at the time you transferred purchase plans. amount you paid for the stock (the option price)
the option. At the time of the exercise, the trans- and the amount you receive when you sell it.
feree recognizes no income and has a basis in For either kind of option, you must be an You generally treat this amount as capital gain
the stock acquired equal to the FMV of the employee of the company granting the option, or loss and report it as explained in the Instruc-
stock. or a related company, at all times during the pe- tions for Schedule D (Form 1040) for the year of
Any transfer of this kind of option to a rela- riod beginning on the date the option is granted the sale.
ted person is treated as a non-arm's-length and ending 3 months before the date you exer- However, you may have ordinary income for
transaction. See Regulations section 1.83-7 for cise the option (for an ISO, 1 year before if the year that you sell or otherwise dispose of
the definition of a related person. you're disabled). Also, the option must be non- the stock in either of the following situations.
Recourse note in satisfaction of the ex- transferable except at death. • You don't satisfy the holding period re-
ercise price of an option. If you're an em- quirement.
ployee, and you issue a recourse note to your If you don't meet the employment require- • You satisfy the conditions described under
employer in satisfaction of the exercise price of ments, or you receive a transferable option, Option granted at a discount under Em-
an option to acquire your employer's stock, and your option is a nonstatutory stock option. ployee stock purchase plan, later.
your employer and you subsequently agree to Your employer or former employer should re-
reduce the stated principal amount of the note, port the ordinary income to you as wages in

Page 12 Publication 525 (2022)