[{"data":1,"prerenderedAt":7},["ShallowReactive",2],{"faq-standard-3533":3},{"rec_id":4,"title":5,"text":6},"3533","Incentive Stock Options (ISO)","Incentive stock options (ISO) are a tax-favorable form of stock compensation where you don't need to report ordinary wage income when you exercise the ISO. Qualifying ISOs only generate reportable income when the stock is sold as long-term capital gains. \u003Ca href=\"/freefile2025/answers?faq=1609\">Nonqualified stock options (NQSO or NSO)\u003C/a> are another form of incentive stock option that aren't as tax favored.\n\u003Cbr>\u003Cbr> \nIn order to have a qualifying disposition when you sell your stock you'll need to hold the stock for:\n\u003Col>\n\u003Cli>\nAt least two years after the grant date AND\n\u003C/li>\n\u003Cli>\nAt least one year after the exercise date\n\u003C/li>\n\u003C/ol>\nIf you sell the ISO stock before the two-year grant date and one-year exercise date, the sale will be a disqualifying disposition. That means the smaller of the bargain element (the difference between the exercise price and the market price on the exercise date) or the gain from the sale* is reported as compensation on your \u003Ci>W-2\u003C/i>. *Sometimes the gain can't be used if it's a related party transaction, wash sale, or was gifted.\n\u003Cbr>\u003Cbr>\nYour employer or former employer should report the ordinary income to you as wages in \u003Ci>Box 1\u003C/i> of your \u003Ci>W-2\u003C/i>. Check that your employer has included the correct ordinary income on your \u003Ci>W-2\u003C/i>. The \u003Ci>W-2\u003C/i> may have an item in \u003Ci>Box 12\u003C/i>, or a note in \u003Ci>Box 14\u003C/i>. If you are not sure, call your employer's payroll department. If the income is not correctly included on your \u003Ci>W-2\u003C/i>, contact your employer to get a corrected \u003Ci>W-2\u003C/i>. \n\u003Cbr>\u003Cbr>\nYou should receive \u003Ca href=\"/freefile2025/answers?faq=10827\">Form 3921\u003C/a> when you exercise an ISO.\n\u003Cbr>\u003Cbr>\n\u003Cb>Alternative Minimum Tax (AMT)\u003C/b>\u003Cbr> \nIf you hold the ISO stock long enough to have a qualifying disposition, you'll need to report the bargain element as compensation on \u003Ci>Form 6251\u003C/i> in the year that the ISO is exercised.\n\u003Cbr>\u003Cbr>\nIn the year that you dispose of the ISO stock, there'll be an adjustment for the gain on the sale of the ISO stock. This is because the cost basis of ISO stock is different for regular tax and AMT. For regular tax, the cost basis of the ISO stock is the exercise price paid for the stock only. However, because the bargain element was taxable for AMT, the AMT cost basis of ISO stock is equal to the exercise price plus the bargain element that was previously included in AMT. You'll need to report any necessary adjustment on \u003Ci>Form 6251\u003C/i>. \u003Cbr>\u003Cbr>\nWe support ISO transactions that aren't qualified and were sold in the same year they were exercised. If the exercised options weren't sold the same year or you have qualified ISO transactions, we won't be able to support your situation and you'll have to file with another software.",1777391557896]