NQSOs, ESPPs, ISOs, Restricted Stock, and RSUs

A non-qualified stock option, or NQSO, is a type of stock option that does not qualify for special tax treatment under US Internal Revenue Code. It is the most common form of stock option. When you exercise NQSOs, you receive ordinary income (to the extent the market value of the stock exceeds the exercise price). Your company receives a corresponding tax deduction as long as it reports your income to the IRS.

How do I balance out what is reported on my W-2 and what will be reported on my Schedule D so I don't double report this gain/loss?

When you exercise an option to buy non-qualified stock shares (NQSO), your employer adds the difference between the price you pay and the market price that day to your paycheck.

Look at your Form W-2 or NQSO paperwork you received from your employer.  It shows the total amount that was added to your paycheck.

Here's an example:

Linda works for ABC Corporation.  In June 2003 ABC granted her 500 non-qualified stock options (NQSOs) at the market rate of $10 per share. In February 2007, the market value of ABC stock was $25.  Linda exercised her 500 NQSOs at $10 and sold them the same day in a cashless transaction. The stock cost her $5,000 and her sales proceeds were $12,500. The ABC payroll department included the difference between the market price and her option price, or $15 per share, in Linda's wages.  Withholding taxes were deducted from this amount. 

The payroll department figured her wages and withholding this way:

• Difference between market price and option price (($25 - $10) x 500 = $7,500).
• Federal withholding tax, state withholding tax, social security and Medicare taxes on the $7,500 totaled $3,300.
• Linda received a net check of $4,200.

Since the $7,500 was already added to Linda's income (as wages), Linda can add that amount to her cost of the shares.  Her total cost basis in the shares is $12,500.  Notice that this is the same amount as her sales proceeds.

For more information and examples, read Non-Qualified Stock Options.

Note: If you do not have the paperwork for the transaction from a former employer, you will need to contact the employer's payroll representative or contact your financial institution who held the options. If you cannot file in time due to needed forms, you can file an extension of time to file.

If these were sold within the 2-year period of the grant/buy, then you should have some gain (bargain element) on your Form W-2 (unless you no longer work for that company when you exercised the options). This must be added to the cost basis to reduce any gain or increase any loss.

If you held the options longer than the 2-year period, then there are no consequences for Form W-2 and all gains/losses are reported in the stock sale.

See how to enter ESPP transactions in TurboTax for more information.

For more information and examples, see Employee Stock Purchase Plans. 

Tip: TurboTax Premier and Home & Business products contain more guidance with entering investment transactions than TurboTax Basic and Deluxe. TurboTax Premier and Home & Business uses a Cost Basis Lookup tool that will determine the cost basis of an investment security for you.

ISOs are options to buy stock at a set option price that are granted by a company to an employee, provided the IRS code provisions governing ISOs are met.

For more information and examples, see Incentive Stock Options.

Restricted stock is stock that you get from your employer for services you perform and that is nontransferable and subject to a substantial risk of forfeiture.

Unless you make a special election (see "Section 83(b) Election" below), you do not have to include the value of the stock in your income when you receive it. However, if you get dividends on restricted stock, you must include them in your income as wages, not dividends. See Restricted Property in IRS Publication 525 for information on restricted stock dividends.

Your employer should include these dividends in the wages shown on your Form W-2. If you get a Form 1099-DIV for these dividends, list them on Schedule 1 (Form 1040-A), line 5, or Schedule B (Form 1040), line 5, with the other dividends you received. Enter a subtotal of all your dividend income several lines above line 6. Below the subtotal, enter Dividends on restricted stock reported as wages on Form 1040 (or Form 1040-A), line 7, and enter the amount of the dividends included in your wages on line 7 of Form 1040 or Form 1040-A. Subtract this amount from the subtotal and enter the result on line 6.

Section 83(b) Election

You can choose to include the value of restricted stock in gross income as pay for services when the shares are granted instead of when they become vested. If you choose this option, you can report the dividends on the stock like any other dividends. List them on Part II, line 5, of Schedule 1, or Schedule B, along with your other dividends (if the amount of ordinary dividends received from all sources is more than $1,500). Also, future gains on the sale of the stock will be treated as capital gains rather than ordinary income as they would if you did not make the election.

If you receive both a Form 1099-DIV and a Form W-2 showing these dividends, do not include the dividends in your wages reported on line 7 of Form 1040 or Form 1040-A. Attach a statement to your Form 1040 or Form 1040-A explaining why the amount shown on line 7 of your Form 1040 or Form 1040-A is different from the amount shown on your Form W-2.

Independent Contractor

If you received restricted stock for services as an independent contractor, the rules described above also apply. Generally, you must treat dividends you receive on the stock as income from self-employment.

How to enter Restricted Stock Dividends in TurboTax

In TurboTax Online:

1. Select the Tools button in the upper right-hand portion of the screen. 
2. Select Topic Search. 
3. When the window opens, type "restricted stock, dividends" into the box, select the item, and then select Go. 
4. Follow the instructions below:
    

In TurboTax Desktop:

1. Enter your cursor into the search box in the upper right-hand portion of the screen. 
2. Type "restricted stock, dividends" into the box and select the item.
3. Follow the instructions below.
    

1. In the Any Taxable Dividend Income? screen, select Yes.
2. In the Enter Dividend Income screen, do the following:
   • Select the I'll type it in myself option.
   • Enter the information on your Form 1099-DIV.
   • Select the I need to adjust these dividends check box at the bottom of the screen.
   • Select Continue.
3. In the Report Dividend Adjustment screen, do the following:
   • Enter an amount in the Adjustment Amount box.
   • Select the Other adjustment, including restricted stock dividends reported on Form W-2 option for Type of Adjustment.
   • Select Continue.
4. In the Taxable Dividend Income Summary screen, you can add another broker or payer for dividend income, or select Done.

Restricted Stock and RSUs are similar but RSUs are simply a promise to grant shares of stock as compared to actually owning restricted stock.

The grant of shares associated with RSUs typically occurs on a vesting schedule or the meeting of certain milestones by the employee or the company.

The value of the stock when vesting occurs is included in your income as ordinary income. If you later sell the shares, the change in value is either a capital gain or loss.

Some RSUs receive dividend equivalent payouts even though the employee does not own the shares. This income is treated as ordinary income and should be included as wages on your W-2.