Disqualifying ISO disposition with compensation missing from W-2 - tax reporting help

Thanks for the detailed answer! Quick follow-up: wouldn't reporting on Line 8z make it subject to self-employment tax? I thought ISO compensation was supposed to be treated as W-2 income without SE tax? Also, any idea why companies mess this up so often with disqualifying dispositions?

Great question! No, putting it on Line 8z of Schedule 1 won't subject it to self-employment tax. Self-employment income goes on Schedule C and Schedule SE. Line 8z is for "Other Income" that isn't subject to self-employment tax. Just be sure to clearly label it as "ISO bargain element not reported on W-2" so the IRS understands. Companies mess this up because their payroll systems often don't track what happens after you exercise. When you exercise and sell on the same day, it's easy for them to include in that paycheck. But when you exercise in one year and sell in another, many payroll systems aren't sophisticated enough to catch it unless you specifically notify them. Plus, some companies' stock admin teams and payroll departments don't communicate well with each other.

Does it help with other equity compensation too? I've got RSUs and ESPP shares that always confuse me at tax time. Also, how accurate is it compared to what a CPA would tell you?

I'm skeptical about these tax tools. How does it handle state-specific issues? I live in California and they treat ISOs differently than the federal government for AMT purposes.

It absolutely handles RSUs and ESPP shares too! I used it for my wife's RSUs last year and it correctly identified which lots were long-term vs short-term, calculated her adjusted basis, and even explained the supplemental wage withholding that was applied. It's specifically built for equity compensation, which most general tax software doesn't handle well. For state-specific issues, it does cover California's special treatment of ISOs for AMT purposes. I'm in New York, but it had a specific section explaining state differences including CA's rules about carrying forward AMT credits. It's not replacing a CPA, but it gives you everything documented so you can either file yourself or hand the detailed report to your CPA to save them time (and save you money on their hourly fee).

Wait, how does this actually work? Does it just keep calling the IRS for you? I've been trying to reach someone about my ISO reporting for weeks now.

Sounds too good to be true. The IRS wait times are insane right now - there's no way they can get you through that fast unless they're doing something sketchy.

It uses a technology that monitors the IRS phone lines and calls at the optimal times, then holds your place in line. When they're about to connect to an agent, you get a call letting you know it's time to talk to the IRS. You don't have to sit on hold - you just take the call when an agent is actually available. It's completely legit - nothing sketchy going on. They just figured out when the IRS phone lines are least busy and created a system that does the waiting for you. I was skeptical too, but when I got the call saying "Your IRS agent is ready" after doing other things for 45 minutes, I was sold. The agent I spoke with was super helpful and had no idea I'd used a service to reach them.

I'm with Carta actually. I checked their tax forms area but didn't see anything about the disqualifying disposition specifically. They have an ISO exercise report from when I exercised in 2023, but nothing showing the sale in 2024 being connected to that exercise. Maybe I need to dig deeper into their reporting section?

Carta should definitely have this info! Look for their "Tax Package" or "Tax Forms" section. Sometimes it's not obvious - try looking for a section called "Transactions History" and there might be a tax reporting view or download option. If you can see your original exercise, there should be a way to see all transactions for those specific shares. If you can't find it, reach out to Carta's support. Unlike the IRS, they actually respond pretty quickly! Ask specifically for "disqualifying disposition tax reporting information" and they should be able to point you to the right report or generate one for you.

TurboTax does handle it but it's not intuitive at all. You need to manually enter the bargain element as "Other Income" and then adjust your cost basis on the stock sale entry. When you enter the 1099-B, choose "I'll enter additional information" and there should be a field for "Cost basis adjustment" where you add the bargain element amount. It's super easy to miss if you're just following their standard interview process. Their "stock options" section is mostly focused on current-year exercises, not prior year exercises with current year sales.

Thanks! Found it after digging around in their interface. For anyone else using TurboTax, go to Income > Other Common Income > Miscellaneous Income, then enter the bargain element with the description "ISO bargain element from disqualifying disposition." Then when entering the 1099-B, choose the option to adjust the basis and add that same amount to your cost basis. Worked perfectly!

This is such an important point that everyone should see! The CP2000 notices are really common with equity compensation because the IRS systems just do a simple match between 1099s and what's reported on your return. They don't automatically understand the tax treatment nuances. For anyone reading this thread, definitely keep a folder with: your original ISO grant agreement, exercise confirmations with FMV at exercise, sale confirmations, and a simple spreadsheet showing your calculations. When you file, consider attaching Form 8949 with a clear description in Column (f) like "ISO disqualifying disposition - bargain element reported as other income." Pro tip: if you do get a CP2000, don't panic! You have 30 days to respond, and as long as you can show your work like Emily did, they'll usually accept your explanation and close the case.