1099b + w2 don't add up, wtf?
February 24, 2010 6:19 PM   Subscribe

I cashed out some stock options (my employer's stock) and I got a 1099B and W2, 1099B shows gross proceeds of stock sale, W2 includes profits. How does this work?

In the past, I've had some proceeds from stock sales, interest, etc. that gets reported on 1099 (interest), and I file schedule D (capital gains), I think, to report this.

Last year (2009) I cashed out some options I was given by my employer. I get a 1099B from the broker (merrill lynch) showing gross proceeds of the stock sale (way, way more than I made), with zero dollars withheld (though they sent me "transaction journal" entries showing more sensible numbers, with profits, and withholding, but that's not a 1099, of course.)

And, the proceeds are also included in my W2.

So, it kind of seems like the money is being vastly overreported. My profits are being reported (most correctly, in my view) in the W2, and then some crazy numbers (gross proceeds from sale of stock -- not even counting that it was options, and no withholding) are in the 1099B.

How does this work? I called Merrill Lynch, and asked them how these numbers could be reconciled, but the guy I talked to seemed clueless. I more or less convinced him these numbers couldn't be reconciled -- or at least he had no idea how to reconcile it -- short of sending me a ~$64000 check, which would match the numbers they reported, but which they weren't about to do. I suppose it's literally a $64000 question.

If I report all this the way it seems like I've always done in the past, I'm going to be paying taxes on something like 2x what I actually made.

Any insight appreciated. Probably it's something stupid I'm just missing.
posted by smcameron to Law & Government (10 answers total) 1 user marked this as a favorite
Need more information. Are these NQSOs or ISOs? When you "cashed out" the options, what exactly did you do -- was it a same-day exercise and sale, or something else?

If your employer hands out stock options, they probably also are used to their employees being confused about the tax implications; have you asked them for help?
posted by xil at 6:38 PM on February 24, 2010

What happened, I believe, is that basically, you had *two* stock transfers here, not one.

The first was the transfer of the stock to you by the company. This is what's on your W-2. It might have been *done* through Merrill Lynch, but they weren't the ones responsible for sending you the appropriate tax form, your employer was.

The second is the transfer of the stock in the sale. This is what's on your 1099B. The 1099B reflects only the selling price, not your basis in the stock. The basis is something you're considered to be responsible for keeping track of yourself, in the IRS' view, so you deduct the basis you've established from the selling price, and this is your amount of capital gain.

But that's just everything in *extremely* general terms. Really, just take all this stuff to a CPA to do your taxes this year. Stock options are probably outside the realm of what you should be doing yourself, just given the way you're talking about this. (Not that I mean any offense! But someone who's qualified to handle this wouldn't refer to a 1099 for stock proceeds as being for 'interest'.)
posted by larkspur at 6:42 PM on February 24, 2010

This is really a situation where you need to speak to a CPA who prepares tax returns.

And by "a CPA who prepares tax returns," I don't mean H&R Block. I mean, a CPA for whose expertise you pay a relatively large fee.

Stock options are extremely complicated, as are the tax implications of their exercise.

This is not something you want to screw up.
posted by dfriedman at 6:42 PM on February 24, 2010 [1 favorite]

However: it sounds like you're talking about NQSOs and a same-day sale. There are two parts to this.

1. The 1099B shows that you exercised the options (acquiring the stock), then immediately sold it. Since you sold at the same price as your basis, your net gain from that is zero, so there is zero tax to withhold.

2. NQSOs are taxable as ordinary income when exercised. Roughly, the taxable amount is the difference between the price when granted and the price at which you exercised. This amount will show up on your W-2. Your employer may or may not have had taxes withheld from it, but you should have some statement saying so, someplace (and the amount withheld will also be on your W-2.

Please do your own research and don't take my word for any of this -- I'm not being very precise, just sketching out a situation I'm familiar with, which might be similar to yours.
posted by xil at 6:44 PM on February 24, 2010

It sounds to me like what happened here was you exercised NQSOs. The way these work is that your "actual gain" is reported as the total price of the sale of the options, and your exercise of those options is reported separately. So for something you only received $x in profit for, the actual sale price of the options (let's say they were at $20 a share and you sold $1000 of them) was $20K. Your strike price might have been at $18, meaning you only actually "profited" by $2K. This is usually categorized (IIRC) as "imputed income" on your W2, though I don't have mine handy to check - box 12b or something like that. The actual calculation involves you determining the price on the date the option was sold, the strike price (price you paid), etc.

It's somewhat of a complicated area so you should definitely seek out the advice of a professional, but I use TurboTax online every year and it accounts for this with a little work on my side. What you want is a statement from the broker, which you probably should have already received, that contains the information you need to determine the "difference" (because PROBABLY, but not CERTAINLY, a portion of your options were taxed at the time of exercise).

IANYTP (your tax professional), and every situation is different.
posted by arimathea at 6:47 PM on February 24, 2010

Response by poster: xil. Thanks. What I did was called iirc, a "cashless sell" on the Merrill Lynch site. I think it means this: I instantly borrowed money, instantly bought the stock (at the option price), and instantly sold it (at market price), and instantly paid back the borrowed money, plus a small fee, and pocket the proceeds.

I'm not familiar with your acronyms, but everything happened in one day (one instant, or as fast as the market allows, I guess.)
posted by smcameron at 6:51 PM on February 24, 2010

NQSO = Non-qualified Stock Option
ISO = Incentive Stock Option

The two are taxed in significantly different ways. It's more likely that you have NQSOs, but you really need to know which you had before you go any further. Again, ask your employer's HR, they should be able to tell you.
posted by xil at 6:55 PM on February 24, 2010

Response by poster: xil: Thanks again, I'll find out.

I know the options weren't "vested" immediately, but took some time. When I exercised them they were 100% vested.

(Just thinking maybe that's pertinent to whether they were NQSO or ISO)
posted by smcameron at 6:59 PM on February 24, 2010

This is normal.

In the most common case (NQSO & nothing weird), you all the income goes on your W2 (taxed like income, not capital gains), and your Schedule D reports a small loss of the commissions you paid to sell the shares. Or the Schedule D reports no gain or loss if you want to keep things simple.

IMO, the most critical thing is that the total on your Schedule D (line 3 + line 10) must match the total of all the 1099Bs Box 2 you have. This is a basic IRS check and if it doesn't, you will get an automated audit (CP2000) that assumes the difference is 100% capital gains.
posted by smackfu at 7:11 PM on February 24, 2010

Also, if they are NQSO, they should show up on the W-2 in Box 12. From the IRS instructions:
Code V—Income from the exercise of nonstatutory stock option(s)
posted by smackfu at 6:49 AM on February 25, 2010

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