Employee Stock Option Tax Question
Good Afternoon,
I have a client who exercised an employee stock option resulting in a net acquisition of 161 shares of VZ stock @ $46.05/share on March 28th, 2002. The client reinvested dividends in additional stock purchases while in the Verizon Savings Plan for Management Employees until he transferred them to a non-qualified brokerage account with UBS in July 2007, resulting in 199 shares transferred in total (I’m guessing this was done to capitalize on NUA rule for capital gains?). The client stated that gains and taxes were reported on his 2002 tax return. I’m curious what the cost basis of the transfer was when the shares we’re moved to the non-qualified brokerage account in 2007 and how it would be calculated. Would the basis be $7,414.05 (161 * $46.05/share) upon transfer? Or did the reinvested dividends increase the basis? I’m slightly confused where this all took place within a company savings plan. Thanks in advance, and if you need any additional information, please don’t hesitate to ask.
Permalink Submitted by Alan - IRA critic on Tue, 2019-07-23 17:33
NUA is not applicable because these equity comp plans are not qualified plans. The original shares retain the same basis which depends on the type of stock option these were. Client cannot depend on the broker reporting the correct cost basis when the shares are sold, so client willhave to rely on their old records.
Permalink Submitted by Jeffrey Truchon on Wed, 2019-07-24 12:59
Thanks Alan. These were non-qualified stock options. The client paid taxes and gains on his 2002 tax return (the year the options were excersized). I’m also noticing that the price of VZ stock on 3/28/2002 was $41.46/share. Does this mean they were underwater stock options when exercised? As I mentioned, the client held the stock in his employee savings plan and continued to reinvest dividends until he transferred a total of 199 shares to an outside brokerage account in July of 2007. I guess I’m wondering if you could explain how the basis would be calculated to give me a better understanding, if you have enough information for that to be possible. Thank you in advance!
Permalink Submitted by Alan - IRA critic on Thu, 2019-07-25 03:41
Sorry, but this site does not include equity comp issues. But generally speaking, the basis will be what was paid plus the bargain element taxed in 2002. Further, VZ had had 3 stock splits since 2002 (where barely more than 1 share was issued per share for each split). That would slightly reduce the current cost basis per share. As for dividend reinvestment, the amount of dividends would also add to total basis, but unless the shares were purchased through a DRIP program, the additional shares acquired would have their own basis. With DRIP shares I believe all the shares can carry an average cost basis when sold, normally not possible for stocks otherwise. Accordingly, this is a complex matter that requires some research to determine the actual basis and resulting cap gain or loss. Most shares, other than those purchased in the past 12 months have a LT holding period.