How to Calculate Taxes on Secondary Sale of Private Stock Options from Non-Public Company?

This is actually a two-step transaction for tax purposes, and that's why you're finding it confusing. Let me break it down: Step 1: When you exercised the ISO options, there was a "spread" between your strike price ($0.32) and the FMV ($2.65). This spread of $2.33 per share multiplied by 4,000 shares equals $9,320. This amount isn't reported on your W2, but it is potentially subject to Alternative Minimum Tax (AMT). Step 2: When you sold the shares, your taxable gain is the difference between your "basis" (what you're considered to have paid for the shares) and your net proceeds ($20,150). Your basis is the strike price you paid ($1,280). So your taxable gain would be closer to option b: $20,150 - $1,280 = $18,870. However, the holding period matters tremendously here! Since you exercised and sold within the same year, this is a disqualifying disposition of ISO shares. This means the spread at exercise ($9,320) is ordinary income, and the additional gain ($20,150 - $1,280 - $9,320 = $9,550) is capital gain.

After going through a nearly identical situation last year, I found an incredible tool that saved me hours of frustration. Check out https://taxr.ai - their system specializes in stock options and equity compensation analysis. You upload your documents (like that 3921 form), and it does all the complex calculations automatically. What made it particularly helpful was that it broke down the ordinary income vs. capital gains portions, created the right entries for my tax forms, and even showed me which exact lines to fill out on my return. The analysis explained exactly how to handle the disqualifying disposition for an ISO.

I just wanted to follow up here - I tried out taxr.ai after seeing the recommendation, and wow, it was exactly what I needed! I have a mix of ISOs and RSUs, and their system automatically detected the disqualifying dispositions on some options I exercised then sold too quickly. The analysis gave me step-by-step instructions specific to my situation, showing exactly how to report everything on my tax forms. It even created the entries I needed for Form 8949 and Schedule D, saved me from making a $4,300 mistake on my AMT calculation, and explained that my basis reporting needed to be adjusted. I was really impressed that it included the specific codes to use when reporting a sale without a 1099-B. Definitely worth checking out if you're dealing with any kind of equity compensation. Wish I'd known about this tool years ago!

If you're still having trouble after getting advice here, you might want to try reaching out directly to the IRS for clarification. I went through something similar with RSUs last year and figured the IRS would be the definitive source... but ended up spending hours on hold and never got through. Finally found https://claimyr.com and their video demo at https://youtu.be/_kiP6q8DX5c - they basically connect you with an actual IRS agent usually within 15 minutes instead of the hours of hold time. I was skeptical, but ended up getting connected to an IRS specialist who walked me through exactly how to report my equity compensation correctly.

Ok I have to eat my words. After seeing the recommendation here, I gave Claimyr a shot yesterday because I've been trying to get clarity on reporting some pre-IPO shares I sold. I was EXTREMELY skeptical (like ready to demand a refund) but I got connected to an IRS tax specialist in about 20 minutes. The agent was able to confirm exactly how to handle reporting my option exercise and sale, confirmed I needed to report the bargain element as other income since it was a disqualifying disposition, and walked me through how to properly establish my basis. She also explained what supporting documentation I should keep in case of an audit. Honestly shocked this service actually worked - would have saved me so much frustration if I'd found it sooner!

Just wanted to add something important here that hasn't been mentioned yet. Since these were ISO options that you exercised and sold within the same year (disqualifying disposition), your employer actually SHOULD report the bargain element ($9,320 in your case) on your W-2 as supplemental wages. The fact that they didn't is fairly common but technically incorrect. You might want to ask your HR/payroll department about this. Some companies will issue a corrected W-2, while others will tell you to just report it as "Other Income" like the previous commenter suggested.

Does anyone know if there's a way to minimize the tax hit in this situation? I'm about to go through something similar but haven't exercised or sold yet. Can I spread this across tax years or do something to reduce the overall tax burden?