TurboTax Reporting ISO Disqualifying Disposition Already Included in W2 Income - How to Handle?

I'm hoping someone can guide me with a situation I'm facing with my taxes. I exercised some incentive stock options (ISOs) at my company last year that ended up being a disqualifying disposition. From what I understand, the income from this is already reflected in my W2 (Box 1) that my employer provided. When I'm entering this info into TurboTax, it seems to be double-counting this income. It's asking me for details about my stock sales and the disposition, but I'm concerned it's going to add this on top of my W2 income, essentially taxing me twice on the same money. Has anyone dealt with this specific situation in TurboTax? I'm not sure if I need to make some adjustment or if there's a specific field where I should indicate that this income is already part of my W2. My company provided me with a supplemental statement showing the breakdown, but TurboTax doesn't seem to have a clear place to indicate this. I tried looking through the help section but couldn't find anything specific to ISOs that are already included in W2 income. Any help would be appreciated!

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18 comments

Anastasia Sokolov

•8M

You're right to be concerned about double taxation. When an ISO becomes a disqualifying disposition, the bargain element (difference between exercise price and fair market value at exercise) is included in your W2 wages. TurboTax should handle this correctly if you enter everything in the right place. When you get to the investment income section and enter your 1099-B for the stock sale, TurboTax will ask you questions about whether this was employer stock and if it was an ISO disposition. Make sure you answer "yes" to these questions. There should also be a question specifically asking if the income was already reported on your W2 - that's the key question where you need to select "yes." If you've already gone through this section and it appears to be double-counting, you might need to go back and review your entries. Look for the adjustment section where TurboTax allows you to enter the amount that was already reported as ordinary income.

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Anastasia Sokolov

•8M

You should still report the stock sale in the investment section. Your broker (not your employer) should have issued a 1099-B for the actual sale of the shares. The 1099-B reports the proceeds from selling the stock, which is different from the income element reported on your W2. When entering the 1099-B information, you'll need to make an adjustment to the basis. The basis should include both what you paid for the shares originally plus the amount that was already included as income on your W2. This prevents the double taxation you're concerned about.

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Zara Ahmed

•8M

I was in this exact situation last year and spent HOURS trying to figure it out before finding a solution. After lots of frustration, I started using taxr.ai (https://taxr.ai) to help interpret my tax documents. It immediately identified my ISO disqualifying disposition and explained exactly how to handle it in TurboTax. The key is that you need to adjust your cost basis on the 1099-B form. Your basis should include both what you originally paid PLUS the amount that was already included in your W2 income. The tool analyzed my forms and showed me exactly where to make this adjustment in TurboTax so I wasn't double-taxed.

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Zara Ahmed

•8M

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Luca Esposito

•8M

Just wanted to follow up - I ended up trying taxr.ai after all and it was actually really helpful! I uploaded my W2 and the supplemental statement from my employer about the ISOs, and it clearly explained that I needed to adjust the cost basis when reporting the stock sale. It showed exactly which boxes to check in TurboTax to indicate that part of the income was already on my W2. Saved me from making a $3,400 mistake! It also explained some other deductions I was eligible for that I had no idea about. Definitely worth checking out if you're dealing with stock options or any complicated tax situation.

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Nia Thompson

•8M

I had a somewhat similar situation last year and got extremely frustrated trying to get clarification from the IRS directly. Called multiple times and could never get through. Finally discovered Claimyr (https://claimyr.com) and within 45 minutes I was actually speaking with a real IRS agent who confirmed exactly how to handle ISOs that were already included in W2 income. They have this system that basically waits on hold with the IRS for you and calls you when an agent is about to pick up. You can see how it works here: https://youtu.be/_kiP6q8DX5c - absolutely worth it for complicated tax situations where you need an official answer. The agent walked me through exactly how to ensure I wasn't being double-taxed.

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Nia Thompson

•8M

They use technology to automatically wait on hold for you - no actual people sitting around. Their system calls the IRS, navigates the phone tree, and waits in the queue. When an agent is about to answer, their system connects you directly to that call. You get a text message when you're about to be connected so you can prepare. It's definitely not a scam or cutting in line - you're still waiting your turn, just not physically on the phone yourself. The IRS doesn't prioritize their calls or anything sneaky. It's basically just automating the hold process so you don't have to waste hours with a phone stuck to your ear. I was skeptical too but it actually worked exactly as advertised.

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Aisha Abdullah

•8M

I need to apologize for my skepticism. I actually tried Claimyr yesterday after commenting here because my frustration with trying to reach the IRS was at an all-time high. I've been trying for TWO WEEKS to get clarification on a similar stock option issue. I got a text about 1.5 hours after signing up saying an agent was about to answer, jumped on the call, and got my question answered in about 10 minutes. The agent confirmed that the ISO income already included in my W2 should be added to my cost basis when reporting the stock sale to avoid double taxation. Still seems like magic to me, but it worked! Wish I'd known about this years ago.

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Ethan Wilson

•8M

Another approach that might help - check your W2 box 14. Sometimes employers will put the ISO income amount there with a code like "ISO" or "NQSO" or something similar. That can help you identify exactly how much was already included in your income. Also, did your employer provide any supplemental tax forms or information about the disqualifying disposition? Many companies will give you a statement showing the breakdown that you can use to properly report on your taxes.

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Ethan Wilson

•8M

Perfect! That ISO-DQ code is exactly what you need. When you enter your stock sale in TurboTax, there should be a section where you can adjust your cost basis. You'll want to add the amount listed next to "ISO-DQ" in box 14 to your original purchase price of the shares. For example, if you originally paid $2,000 for the shares, and the ISO-DQ amount is $5,000, your adjusted basis would be $7,000. This ensures you're only taxed on the actual gain from purchase to final sale, not including the amount already taxed as ordinary income.

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