Form 3921 reports your exercise of Incentive Stock Options (ISOs)

Did you receive a Form 3921 from your employer? Then you must have exercised some or all of your employer Incentive Stock Options (ISOs) last year.

This article covers what information is reported on Form 3921 and how to incorporate it into your taxes.

How are Incentive Stock Options taxed?

If you’re a beginner on the complex rules surrounding the taxation of incentive stock options, start with our ISO tax guide.

For the rest of you, let’s do a quick refresh. ISOs trigger a taxable event (1) when they are first exercised and (2) when the exercised options are eventually sold.

When employees exercise their incentive stock options, they pay the strike price and acquire the shares of stock. On the day that an employee exercises their ISOs, the company’s stock price might be worth more than the strike price. This difference between the fair market value of the stock on the exercise date and the strike price of the option is added to a person’s income when calculating the Alternative Minimum Tax (AMT) – but is not counted as taxable income in the standard income tax calculation.

When you later sell the stock, we then calculate a second potential tax impact based on the size of the capital gain. Again, the amount of capital gain reported in the calculation for the standard tax will differ from what is reported for AMT, since we were already taxed on some of the gain (the spread) for AMT purposes at time of exercise.

How does Form 3921 come into play?

Form 3921 is sent to you by your employer for any year during which you exercised Incentive Stock Options. The numbers reported on Form 3921 allow you to calculate the additional income that is included when calculating your AMT tax liability.

What numbers are reported on Form 3921?

A blank example of Form 3921 is shown below:

The most important number reported on Form 3921 is in Box 4, the “fair market value per share on exercise date”. That’s because all the other numbers show data that you should be able to find elsewhere. For instance, how many shares you exercised (Box 5), the price you paid to exercise each share (Box 3) and the day you exercised those shares (Box 2) shouldn’t come as much of a surprise.

But Box 4, the fair market value of the company’s stock on the exercise date, is determined by the company’s 409A valuation and the exact dollar amount might be news to you.

Your accountant needs this form because it determines the spread at the date you exercised your options. That spread is calculated by taking the difference between Box 4 and Box 3, and then multiplying by Box 5. This amount is reported as income for purposes of the Alternative Minimum Tax (AMT) calculation, potentially leading to a tax obligation even if you haven’t sold any of the exercised shares yet.

I haven’t received a Form 3921 yet. When should it arrive?

The deadline to be sent Form 3921 by your employer is January 31. If you haven’t received it by then, definitely contact your employer to find out what’s going on.

A second copy of your Form 3921 is sent to the IRS. So, you regardless of whether you received your copy, you need to make an effort to report the tax impact of exercising your ISOs because there won’t be any hiding from the IRS.

Should I hold onto Form 3921 after filing my taxes?

Yes! Remember, ISOs will impact your taxes twice. First, when you exercise, and again when you sell. Although you will now have covered the first taxable event, you still want to make sure you have the information reported on Form 3921 available to you when you calculate the tax impact of the sale. So make sure to keep the Form (either the paper version or a digital copy) so that you don’t lose track of those tax calculations.

Takeaway

Stock options are a great form of compensation that can lead to a lot of wealth, and ISOs are the most tax-advantaged type of employer stock option. But that doesn’t mean they’re simple.

If you received a Form 3921 following the exercise of your options, seek out the help of a Visor tax professional. We’re familiar with the tax rules surrounding options so can help you not only file your taxes but ensure you understand the tax implications before making any future exercise or selling decisions.

 

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