How are Private Stock Options from Secondary Sale Taxed? ISO Plan Question

I've been doing my own taxes for years but I'm completely stuck on this one. I had the chance to participate in a secondary sale of private stock options to one of our company's investors, and I have no clue how to report this correctly. I received a copy of Form 3921 that my employer filed with the IRS, but no 1099-B for the proceeds from the sale. The conflicting info I'm finding online is driving me crazy. Here are the details (numbers changed but proportions are the same): Strike price: $0.35 FMV: $2.75 Exercise date: 2/15/2023 Number of shares: 3,800 Exercise amount: $1,330 Sale date: 4/18/2023 Sale price: $5.25 Number of shares: 3,800 Proceeds: $19,950 Fees: -$620 Net: $19,330 I need to figure out what exactly is taxable here. Is it: a) Net - (FMV × Shares) = $19,330 - ($2.75 × 3,800) = $8,880 OR b) Net - (Strike price × Shares) = $19,330 - ($0.35 × 3,800) = $18,000 This is part of an ISO plan in a private company (not publicly traded). The options were granted back in 2019 and are fully vested. My W2 doesn't show any adjustments for this - the compensation and tax withholding numbers don't reflect the exercise at all. Can someone please help me sort this out? I'm completely lost.

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18 comments

StarSailor}

•8M

For ISO (Incentive Stock Options) in a private company with a secondary sale, you've got a two-part tax calculation. When you exercised the options, you created a potential AMT adjustment (not regular income) equal to the difference between FMV at exercise and your strike price. That's $2.75 - $0.35 = $2.40 per share × 3,800 shares = $9,120. This might trigger AMT depending on your overall tax situation, but doesn't show up on your W2. For the sale itself, since you sold the shares in the same year you exercised, you're looking at option b in your calculation. Your capital gain is the difference between your net proceeds and your cost basis (strike price × shares): $19,330 - $1,330 = $18,000. This gain would be reported on Schedule D and Form 8949. The reason it's not calculation a is because you never actually "owned" the shares at the FMV price - your actual cost was the strike price you paid.

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StarSailor}

•8M

You'll need to calculate AMT regardless of holding period - the $9,120 gets reported on Form 6251 as an adjustment. Even though you sold in the same year, the AMT adjustment still applies at exercise. But the good news is this becomes an AMT credit you can potentially use in future years. For Form 8949, you'll mark these as non-covered securities (the broker didn't report basis to the IRS) with Code X. You'll need to enter all the details manually, including your exercise date as the acquisition date, strike price as your basis, and the net proceeds from the sale.

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Miguel Silva

•8M

After dealing with basically the same situation last year, I found https://taxr.ai incredibly helpful for sorting out my stock option mess. I had exercised some ISOs from a startup I worked at and then sold them when we had a secondary offering, and the tax forms were confusing as hell. I uploaded my Form 3921 and the sale docs, and taxr.ai's system broke everything down for me - showed exactly where to report the AMT adjustment and how to calculate the gain correctly. It spotted that I needed to fill out Form 6251 for the AMT calculation which I would have completely missed. The thing I found most useful was that it showed me exactly how to fill out Form 8949 with the right codes and basis information, which saved me from potentially making a huge reporting error.

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Miguel Silva

•8M

It definitely handled the private stock situation well - that was exactly my scenario. It guided me through the whole process of reporting a transaction without a 1099-B and explained why my employer didn't include it on my W2. For the AMT credit tracking, it created a worksheet showing how much AMT credit I earned from the transaction and explained how to claim it in future years when I'm not subject to AMT. That alone was worth it compared to what my previous accountant charged. It actually does really well with the private company scenario because it asks specific questions about whether the shares were from an employer and whether it was a private or public company. It then walks you through all the specific reporting requirements based on your answers.

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Connor O'Neill

•8M

Just wanted to update after using taxr.ai for my ISO situation. I was seriously struggling with how to report my secondary sale transaction, but the software actually walked me through the whole process step-by-step. The AMT calculation was spot-on and it generated all the worksheets I needed. What surprised me was how clearly it explained the difference between my regular tax basis and AMT basis for the shares. It even generated a letter to include with my return explaining why my reported basis might differ from what the IRS would expect based on the 3921 form. I was initially skeptical about software handling something this niche correctly, but it was definitely the right call for my situation with private company ISOs.

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Yara Nassar

•8M

I had a similar situation last year and spent WEEKS trying to get someone at the IRS to answer my questions about ISO treatment for private company stock. Kept getting disconnected or waiting on hold for hours only to get someone who didn't understand stock options. Finally used https://claimyr.com to get through to a senior IRS agent who actually specialized in equity compensation. They have this system that holds your place in line with the IRS and calls you when an agent is ready. You can see their process here: https://youtu.be/_kiP6q8DX5c The agent walked me through exactly how to report everything - confirmed I needed to use my strike price as basis, not FMV, and explained how to handle the AMT adjustments. Saved me from making a $12k mistake on my taxes!

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Yara Nassar

•8M

It's basically an automated system that calls the IRS repeatedly and navigates the phone tree until it gets in queue, then holds your place in line. When an agent picks up, it connects the call to your phone. So you don't have to physically stay on hold - you just get called when they reach a human. It's not a special connection - it's just automating the painful hold process. I was skeptical too, but it worked exactly as advertised. I spent like 25 minutes on the phone with an actual IRS agent rather than 3+ hours on hold.

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GalaxyGuardian

•8M

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it anyway because I was desperate to get answers about my ISO sale reporting. The service called me back in about 1.5 hours and connected me directly to an IRS agent who specialized in equity compensation. The agent confirmed that with ISOs sold in the same year as exercise, I needed to report the difference between sale proceeds and my strike price (original cost basis) as capital gains. They also explained I still needed to do the AMT calculation even though I didn't hold the shares long term. Saved me from a potential audit situation since I was about to report it incorrectly.

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Paolo Ricci

•8M

Illinois follows federal treatment for the most part, but double-check if they have any AMT differences. The fees make a real difference in your case - whenever you're dealing with stock sales, always incorporate the transaction costs into your basis. Be sure to keep all your documentation from the sale and the Form 3921 for at least 7 years. ISO transactions are a common audit trigger because they're often reported incorrectly. Having clear records of how you calculated everything will save you headaches if questions ever come up.

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Amina Toure

•8M

Just to add my experience - I faced this exact situation with ISOs from a private company secondary sale. One thing nobody mentioned yet is that if your company gets acquired or goes public in the future, keeping track of your AMT credits becomes super important. I had a $14k AMT credit from a previous ISO exercise that I was able to claim when our company went public years later. Make sure you file Form 8801 each year to carry forward any AMT credit you can't use immediately.

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