By Oleg Ikhelson, J.D., CPA, Managing Director, Head of Tax
Navigating the complex landscape of stock option taxation can be a daunting task, and unfortunately, many taxpayers end up paying income taxes twice, first as wage withholdings and then again as capital gains. Even the most accomplished CPAs inadvertently allow clients to overpay taxes, due to limited visibility into their full financial picture. It is important to collaborate with your clients’ wealth advisors, who should have a comprehensive overview of their entire financial framework, to prevent them from overpaying tax on equity compensation.
Be wary of the “tax traps” below, and work with your clients’ advisory teams to help them avoid double payment of capital gains taxes.
- Paying taxes twice on the spread. This, unfortunately, happens all too often. Consider this scenario: A client exercises a non-statutory stock option at $10 and sells it for $100, resulting in a $90 taxable spread. They pay tax on the spread as additional W-2 compensation, but you report a $90 gain on an incorrect or incomplete year-end IRS form 1099-B, resulting in double payment of taxes.
- Incentive Stock Options Complications. For those dealing with Incentive Stock Options (ISOs), the complexities multiply, especially with the Alternative Minimum Tax (AMT) paradigm. The IRS mandates option holders to calculate gains under two separate systems, maintaining distinct records of cost basis for AMT, as well as regular tax purposes, which would also differ for each options grant. It is imperative to collaborate with the client’s wealth advisor for full visibility of their finances, to better navigate the intricacies of ISOs and avoid overpaying or paying taxes twice.
Accountants are at the forefront of safeguarding clients from the complexities of stock option taxation. By acknowledging common pitfalls and collaborating with experienced financial advisors, CPAs can help guide clients effectively, mitigate double taxation risks, and ensure accurate reporting in the ever-evolving landscape of stock option taxation.
Contact Cresset to collaborate with experienced professionals who can help protect your clients’ assets.
