NQSO taxed over 50% - Is this tax rate normal for non-qualified stock options?

Thanks for explaining. So are you saying this is a reporting error on the 1099-B from Morgan Stanley? Should I contact them to get it corrected, or is there something I need to adjust in the tax software? The idea of paying over 55% in total tax on this transaction seems extreme.

This is a very common issue with NQSOs. The broker reports the original strike price as the cost basis on the 1099-B, but you need to make an adjustment in your tax software. You should be able to enter an adjustment to the cost basis to reflect the FMV at exercise ($106.63 per share), which was already included in your W-2 income. Look for a section in your tax software that allows for "basis adjustments" or "Form 8949 adjustments." You'll need to enter code "B" for "Basis reported to the IRS is incorrect" and then enter the correct adjusted basis. This will prevent that income from being double-taxed. Once corrected, your total tax should be closer to that initial 36% withholding.

Did you have to upload all your documents to taxr.ai? I'm in a similar situation with Shareworks and I'm not sure I want to upload all my financial docs to some random website. How does it actually work?

How accurate was it? Did it tell you exactly what to enter in TurboTax? I'm using FreeTaxUSA and it's not clear to me where to make these adjustments.

You do need to upload the relevant documents, but they use bank-level encryption and don't store them longer than needed for analysis. They just scan them to extract the relevant information, then provide tailored guidance. I was skeptical too, but it was either that or pay thousands in unnecessary taxes. Yes, it was extremely accurate. It gave me step-by-step instructions specific to my tax software (I was using TurboTax). For FreeTaxUSA, it would show you exactly where to enter the Form 8949 adjustments. You basically need to find where you can adjust the cost basis of stock sales and enter code "B" with your adjusted basis amount. The tool shows you screenshots of where to find these fields in different tax programs.

How does this Claimyr thing actually work? Does it just put you on hold with the IRS or what? I've been trying to get through to someone for weeks about my NQSOs.

Yeah right. No way this actually works. I've tried calling the IRS multiple times and it's just "due to high call volume" then disconnect. No service can magically get you through that.

It doesn't put you on hold - that's the point. They have some system that navigates the IRS phone tree and waits in the queue for you. When they finally get an agent on the line, you get a call back so you can speak directly with them. You don't have to sit there listening to hold music for 3 hours. It absolutely does work. I was skeptical too until I tried it. The IRS doesn't just disconnect everyone - they have a certain capacity they can handle. The service basically waits in line for you, so instead of you wasting half your day, you just get a call when an actual human is ready to talk. For complex tax issues like NQSO basis adjustments, sometimes you really need to speak to someone who knows the tax code.

Thank you for these clear steps! Quick question - if my shares were sold at slightly different prices throughout the day (not all exactly at the FMV at exercise), does that change how I should calculate the adjustment?

No problem! If your shares were sold at slightly different prices throughout the day, that doesn't change how you calculate the basis adjustment. The adjustment is still (FMV at exercise - original option price) × number of shares sold. The selling prices will determine if you have any additional short-term capital gain or loss after the adjustment. For example, if FMV at exercise was $106.63, but some shares sold for $106.80 and others for $106.40, you'd have a small gain on some and small loss on others. But the basis adjustment calculation is the same regardless of the actual sale prices.

Yes, you'll absolutely need to make the same type of adjustment when you eventually sell. The key is that when you exercised the options, you already paid ordinary income tax on the spread between your grant price and the FMV on exercise date. That spread was included in your W-2 income for the year you exercised. Your new cost basis becomes the FMV on the date you exercised, not the original grant price. When your broker issues a 1099-B after you sell, they'll likely show the original grant price as your basis, so you'll need to make that same Form 8949 adjustment to avoid being taxed twice on the same income. Keep good records of your exercise date and the FMV on that date!