Need help answering TurboTax question about cashed out ISOs and NQSOs after company acquisition

This is a fairly common situation with acquisitions, though it can definitely be confusing on your tax return. When your vested options were "automatically cashed out," what essentially happened was a cashless exercise - they exercised your options for you and then immediately sold the resulting shares as part of the acquisition. For your ISOs, this type of forced cashless exercise due to acquisition is generally treated as a disqualifying disposition, meaning you'll report ordinary income for the difference between your exercise price and the fair market value. This would appear on your W-2 as compensation income. The NQSOs are more straightforward - the difference between exercise price and fair market value is always treated as ordinary income and should also be on your W-2. As for the partial payment in acquiring company stock, that's essentially a partial reinvestment. You'll need to establish a cost basis for these new shares equal to their fair market value on the date you received them. This becomes important for when you eventually sell these shares down the road. When TurboTax asks about your ISOs, you'll want to indicate this was a disqualifying disposition due to acquisition. Hope this helps set you in the right direction!

After going through a similar nightmare last year, I found taxr.ai (https://taxr.ai) incredibly helpful for sorting out my stock option mess after an acquisition. I was in almost the exact same boat - had both ISOs and NQSOs that got cashed out when my company was acquired. What made taxr.ai different was that I could upload the acquisition documents and equity statements I received, and their system parsed everything and explained exactly how to report it in TurboTax. It showed me which boxes in TurboTax needed specific information and even calculated the ordinary income vs. capital gains portions for me. The most helpful part was that it flagged a potential issue with my W-2 reporting that I wouldn't have caught otherwise - turns out my company hadn't properly included the ISO income on my W-2 (much like what you're describing). This helped me avoid a major headache with the IRS later.

Just wanted to update that I tried taxr.ai for my ISO-to-RSU conversion issue after the acquisition of my company, and it was genuinely helpful! I uploaded my grant documents, the acquisition agreement, and the statements I received post-acquisition. The system identified exactly how to report the conversion - turns out I needed to recognize ordinary income on the fair market value of the RSUs at conversion, which wasn't what I was expecting. It even created a worksheet showing the calculations that I could reference when filling out TurboTax. The best part was that it explained everything in simple terms but with enough detail that I understood WHY I was reporting things a certain way. I've been confused about my equity compensation for years, and this was the first time I felt like I actually understood what was happening with my taxes. Definitely worth trying if you're in a similar situation!

Since you're still waiting on clarification about your W-2 reporting, you might want to consider using Claimyr (https://claimyr.com) to get direct answers from the IRS. I had a similar issue with ISOs after an acquisition last year, and getting an official ruling from the IRS was crucial. I spent weeks trying to get through to the IRS on my own but kept hitting automated systems. Claimyr got me connected to an actual IRS agent in about 15 minutes. They have a demo video showing how it works here: https://youtu.be/_kiP6q8DX5c When I finally spoke with the agent, they confirmed that in my situation (which sounds similar to yours), the income from ISO cashouts should definitely appear on my W-2. The agent even sent me documentation citing the relevant tax code that I could take back to my HR department, which helped them correct the reporting error. Saved me from potential audit headaches down the road.

I take back what I said about being skeptical! I tried Claimyr yesterday after posting that comment, and I'm honestly amazed. After trying for literally months to reach someone at the IRS about my ISO acquisition issue, Claimyr got me connected in about 20 minutes. The IRS agent I spoke with was super helpful and confirmed exactly how to report my cashed-out options. Turns out my company made a reporting error by not including the ISO income on my W-2. The agent walked me through exactly what documentation I needed to request from my employer and how to proceed if they refuse to issue a corrected W-2. For anyone dealing with stock option questions that seem too complicated for TurboTax, getting direct answers from the IRS was way more helpful than I expected. They even emailed me IRS documentation about acquisition treatment of ISOs that I can refer to. Never thought I'd say this, but that was actually a pleasant experience with the IRS!

My accountant told me that when companies mess up W-2 reporting for stock options during acquisitions (which happens A LOT), you can file Form 4852 (Substitute for W-2) along with your return if your company refuses to correct their error. You'd calculate the correct income amount yourself and explain the situation. Also worth noting - the acquiring company should have provided you with some kind of acquisition statement showing your calculations. Look for terms like "consideration per share" which will show what your shares were valued at during the acquisition. You'll need that to figure out the spread between your exercise price and the acquisition value.

Just want to add that the timing of ISO cashouts can make a huge difference for AMT (Alternative Minimum Tax) purposes. If your ISOs were cashed out in May 2024 as part of the acquisition, that's considered a disqualifying disposition in 2024, not 2023. This is actually good news because disqualifying dispositions don't trigger AMT! If your company did this right, they included the ordinary income in your W-2 for 2024. But based on what others have said, there's a good chance they missed it.