<p>When an employee exercises the option and sells all stock, will the gain on the sale reported as wages, tips,… on W-2 or will it be reported as capital gain?</p>
<p>Stock options granted to you will have a strike price. E.g. 1000 stocks at $10 strike price to be 100% vested in one 1 year. So after one year when it vest, you get the stock. The income on that day ( difference between strike price and market price on the vesting day) is reported on W2 and taxed as salary/bonus. Assume the market price is $10 on the vesting day, you had income of $10 * 1000= $10,000. It will be taxed as bonus. Either you have the tax on that day or sell part of the stock to pay for the tax.</p>
<p>Now you hold the stock and sell it later at say $30. You pay the stock gains tax on the difference on the sale price and vested price i.e $10000. If you hold it for more than a year, you pay capital gains.</p>
<p>Well, there are these web pages that you may be interested in:
[Guide</a> to Compensation in Stock and Options](<a href=“http://fairmark.com/execcomp/index.htm]Guide”>http://fairmark.com/execcomp/index.htm)</p>
<p>Beware of Alternative Minimum Tax implications of stock options.</p>
<p>It really depend on the type of options (ISO, NQ or sometimes RSUs get lumped in here as well) and the type of exercise.</p>
<p>I exercised ISO (same day sale) and my company includes my gain due to this transaction on W2.</p>
<p>I have not configured it out. But I believe I still need to report it as capital gain, except that the capital gain is the negative of the amount of fees the broker and SEC charged me for this transaction. I believe I have received some tax form (is it 1099?) from my broker, and also an instruction on how to do this. (But I have not read it in details yet.)</p>
<p>I think I could understand the tax code by reading TurboTax’s instructions if I have the time – including the AMT part. But I think the evil is in the practice in its gory details, not just whatever is said in the tax code, i.e., how the broker and the company actually do their part and then what you as a tax payer should do according to what they have done (i.e., what they have reported to IRS.)</p>
<p>You are correct.</p>
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<p>If you sell an ISO within one year after you exercise it (called disqualifying disposition), there are no AMT implications (other than the higher income can push you into AMT), and all of the gain is treated as regular income.</p>
<p>There is no separate capital gains with an ISO, all of the profit is either regular income or LTCG, depending on how long you hold it and when you sell it after you exercise it.</p>
<p>This is my understanding anyway, I don’t do this for a living.</p>
<p>If the strike price is $2 and value of the stock price is $10, you exercise and sell on the same day then it would be ($10-2) X number of shares. The gain is reported as income on my W2 and I pay income tax on it. I do not hold on to my company stocks.</p>
<p>What oldfort said.</p>