Disqualifying Distribution - ISO - How Is This Reported On My W2?

Wait I'm confused. If I exercised some ISOs last month but haven't sold any shares yet, do I still have to report anything on my taxes? My company hasn't said anything about my W2 changing.

If you only exercised ISOs recently and haven't sold them yet, there's no ordinary income to report on your W2 for regular tax purposes. The exercise itself doesn't trigger any regular tax - that's actually one of the tax advantages of ISOs compared to other stock options. However, you should be aware that the difference between your exercise price and the fair market value on the exercise date could be subject to Alternative Minimum Tax (AMT). This won't show up on your W2, but you'll need to account for it when calculating your taxes. Many people get surprised by AMT when exercising ISOs.

How exactly does taxr.ai handle ISO transactions? I'm getting RSUs, ISOs and NSOs from my company and I'm completely overwhelmed by the different tax treatments. Does it explain AMT impact too? That's what I'm most worried about.

I'm skeptical about using these kinds of services. How does it know the specifics of your company's stock plan? Every company seems to handle their equity comp reporting differently, and my last employer was terrible at documenting anything.

It analyzes all your equity documentation including grant agreements, exercise statements, and trade confirmations to determine exactly what type of equity you have and how it should be reported. It's especially good at identifying disqualifying dispositions like the one you're asking about. For AMT calculations, that's actually where it really shines. It calculates your potential AMT exposure from ISO exercises and helps you understand if you'll be hit with AMT. I was able to avoid a huge AMT surprise by understanding my ISO exercise timing better.

Does this actually work? I've been trying to call the IRS for WEEKS about a similar stock option issue and can't get through. How quickly did you actually get to talk to someone?

This sounds like a scam honestly. Why would I need a service to call the IRS? Can't you just keep calling the regular number until you get through? And why would an IRS agent know the specifics of ISO treatment - that seems more like a tax professional question.

I got through to the IRS in about 15 minutes after trying for several days on my own with no success. The service basically keeps dialing and navigating the IRS phone tree for you, then calls you when they get a human on the line. The IRS agent I spoke with was actually very knowledgeable about stock option treatment. While they can't give tax advice, they can explain reporting requirements and point you to the right publications. In my case, they directed me to specific sections of Publication 525 that covered exactly my situation with ISOs and disqualifying dispositions.

Do you know if the W2 reporting happens in the year of exercise or the year of the disqualifying disposition (when you sell the shares too early)? My company's stock tanked after I exercised so I'm worried about paying taxes on phantom income.

The W2 reporting happens in the year of the disqualifying disposition (when you sell), not in the year of exercise. This is actually helpful in cases like yours. If you exercised ISOs and the stock later declined before you sold in a disqualifying disposition, your ordinary income would be limited to the actual gain you realized (if any), not the bargain element at exercise. If you sold for less than you paid, you'd have no ordinary income on your W2 and would report a capital loss on Schedule D instead. This is actually one advantage of a disqualifying disposition when stock has declined - it can limit your tax exposure compared to a qualifying disposition where you might have already paid AMT on the bargain element.

This happened to me! My company completely missed reporting my disqualifying disposition on my W2. I ended up requesting a corrected W2, but they refused, claiming I needed to report it myself on my tax return. I talked to a tax professional who said the company was wrong - it should be on the W2.

Thanks for the detailed explanation! I'm in a similar situation where I think my company might have missed reporting my disqualifying disposition. When you mention reaching out to the stock plan administrator, do you know what specific documentation I should request from them? I want to make sure I have everything I need to either get a corrected W2 or properly report this myself if they refuse to issue one. Also, is there a deadline for when companies have to issue corrected W2s for stock option reporting errors? I'm getting nervous about filing my taxes without having this resolved.

You should request a few key documents from your stock plan administrator: your exercise confirmation statements showing the exercise date and fair market value, your sale confirmation showing the sale date and price, and any Form 3921 they may have prepared (though they might not have generated one yet if they missed the disqualifying disposition). Also ask for a written statement confirming whether they believe you had a disqualifying disposition and explaining their position on W2 reporting. This will help if you need to escalate the issue. Regarding deadlines, there's no specific deadline for corrected W2s related to stock options, but the IRS generally expects employers to issue corrections "as soon as possible" after discovering errors. However, companies can be slow to respond, especially smaller ones without dedicated stock plan teams. If they won't issue a corrected W2, you can still properly report the income yourself - you'd include the ordinary income portion on your Form 1040 and attach a statement explaining the situation. Just make sure to keep detailed records of all your stock transactions in case of an audit. The IRS is generally understanding about employer reporting errors as long as you report the correct income.

This is such a helpful reminder about Form 3921! I completely forgot about this form when dealing with my ISO situation. I exercised options last year but never received this form from my company. When I called HR, they had no idea what I was talking about and said they only provide W2s for stock compensation. Should I be worried if my company doesn't provide Form 3921? Can I still file my taxes accurately without it, or do I need to push harder for them to issue it? I have my brokerage statements showing the exercise details, but I'm not sure if that's sufficient documentation for the IRS. Also, is there a penalty for companies that fail to issue Form 3921, or is this one of those forms that smaller companies often miss without consequences?