Is this wages or deferred compensation?


O

orangetrader

Situation:

Private company - positioning to go public, but has stalled
recently due to market condition.

Granted stock option several years ago schedule to expire
last year. I exercised the option. Paid my cost basis to
the company and received a piece of paper.

Now, on my W2, lumped with my regular wages, is an
additional amount. It has the wages I earned, plus number
of shares * (FMV - my cost basis). The FMV was determined
by the company. Now I am stucked with a substantial tax
payment for this added amount, it also bumped me up to a
higher bracket as well.

Since I have no gain on this piece of paper until it is
actually sold (if and when it goes public), shouldn't this
be classified as deferred compensation on the W2 and not
taxable until I have a chance to sell?

O
 
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D

David Woods, EA, ChFC, CLU

orangetrader said:
Situation:

Private company - positioning to go public, but has stalled
recently due to market condition.

Granted stock option several years ago schedule to expire
last year. I exercised the option. Paid my cost basis to
the company and received a piece of paper.

Now, on my W2, lumped with my regular wages, is an
additional amount. It has the wages I earned, plus number
of shares * (FMV - my cost basis). The FMV was determined
by the company. Now I am stucked with a substantial tax
payment for this added amount, it also bumped me up to a
higher bracket as well.

Since I have no gain on this piece of paper until it is
actually sold (if and when it goes public), shouldn't this
be classified as deferred compensation on the W2 and not
taxable until I have a chance to sell?
Not even close. You realized the gain when exercised the
option to buy the stock at a price less than fair market
value. It's NO different than a marketable option with the
sole exception that this appears on your W-2 rather than
Sch. D.
 
A

A.G. Kalman

orangetrader said:
Situation:

Private company - positioning to go public, but has stalled
recently due to market condition.

Granted stock option several years ago schedule to expire
last year. I exercised the option. Paid my cost basis to
the company and received a piece of paper.

Now, on my W2, lumped with my regular wages, is an
additional amount. It has the wages I earned, plus number
of shares * (FMV - my cost basis). The FMV was determined
by the company. Now I am stucked with a substantial tax
payment for this added amount, it also bumped me up to a
higher bracket as well.

Since I have no gain on this piece of paper until it is
actually sold (if and when it goes public), shouldn't this
be classified as deferred compensation on the W2 and not
taxable until I have a chance to sell?
The difference between what you paid vs the FMV (the
discount) for exercising nonqualified stock options is by
law considered to be current compensation. It is considered
property transferred in connection with performance of
services (IRC Sec. 83).
 
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S

Seth Breidbart

Not even close. You realized the gain when exercised the
option to buy the stock at a price less than fair market
value. It's NO different than a marketable option with the
sole exception that this appears on your W-2 rather than
Sch. D.
Except if I buy an option for $1, and exercise it to buy a
stock for $20 when the stock is trading for $40, I have a
basis of $21 in the stock but no taxable event occurs until
I sell.

Seth
 

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