Information Reporting on Stock Option Activity By: Daniel C. Dibella, CPA Date: 1/21/2010 As banks complete their 2009 information reporting, there are a few matters that must be addressed with respect to stock options. Some of these issues are: Stock Transfers IRS Code Section 6039 requires corporations to provide a written statement to any person to whom the corporation has issued stock pursuant to such person's exercise of an incentive stock option. The statement, due to transferees by January 31, 2010, must include the following information with respect to the transfer(s) of stock during 2009: The name, address, and employer identification number of the corporation transferring the stock; The name, address, and identifying number of the person to whom the share or shares of stock were transferred; The name and address of the corporation the stock of which is the subject of the option (if other than the corporation transferring the stock); The date the option was granted; The date the shares were transferred to the person exercising the option; The fair market value of the stock at the time the option was exercised; The number of shares of stock transferred pursuant to the option; The type of option under which the transferred shares were acquired; and The total cost of all the shares. The IRS has issued regulations that will require this data to be included in information returns for 2010 activity (though new Form 3921), however, information reporting to the IRS is not required for 2009 incentive stock option exercises. Disqualifying Disposition of Stock If an employee has a disqualifying disposition of stock originally purchased through the exercise of an incentive stock option, the difference between the option exercise price and the fair value of the stock on the date of purchase is taxable to the employee as ordinary income (the difference between the fair value of the stock on the date of purchase and the proceeds from disposition is taxable to the employee as a capital gain or loss).  Banks should include the ordinary income portion relative to disqualifying dispositions as federal taxable wages on information reporting form W-2, and should take a corresponding deduction on the corporate tax return. Exercising Non-Qualified Stock Option If an employee exercises a non-qualified stock option, the difference between the option exercise price and the fair value of the stock on the date of purchase is taxable as ordinary income regardless of whether the stock is held, sold or redeemed. Banks should report gains realized by employees through the exercise of non-qualified stock option agreements as federal taxable wages on form W-2 (on form 1099-MISC for individuals who are not employees - such as outside directors), and should take a corresponding deduction on the corporate tax return.