AMT and Equity Compensation
Alternative minimum tax, nonqualified stock options, incentive stock options and other forms of equity compensation.
medicare 3.8% surtax and same day sale of ISO's
Posted by: jack36, February 28, 2015 07:20PM
Hi,

On a same day sale of ISO's (an exercise followed by a sale on the same day), which is a disqualifying disposition, the income is treated as ordinary income for income tax purposes and appears on a W2 in box 1.

But is this income subject to the 3.8% medicare surtax?

Thanks.

Re: medicare 3.8% surtax and same day sale of ISO's
Posted by: SteveC, March 7, 2015 01:37AM
You might find this article useful with respect to your question:

[www.forbes.com]

Re: medicare 3.8% surtax and same day sale of ISO's
Posted by: Kaye Thomas, March 10, 2015 02:38PM
This income appears to escape Medicare tax altogether: it isn't subject to FICA tax that applies to wages, and there's no indication that the net investment income tax (loosely speaking a Medicare tax on investment income) applies. The regulations on the net investment income tax aren't exactly crystal clear on this point, and I considered submitting a comment requesting a clarification when the regulations were proposed, but decided against doing so based on the thought that my comment might prompt the Treasury to write the regulation in such a way as to impose the tax on this income. This looks like an unintended gap in the law, but as far as I know everyone who's looked at it concludes that as things stand we don't have to treat this item as investment income for purposes of the net investment income tax.

Kaye Thomas
Fairmark.com

Re: medicare 3.8% surtax and same day sale of ISO's
Posted by: jack36, December 30, 2015 11:34PM
Ok, what if the ISO's are held, and sold as a disqualifying disposition, held for less than a year; is the 3.8% surtax payable on SalesPrice - ExercisePrice OR SalesPrice-FMV?

Eg, if the ExercisePrice = $5, the FMV on exercise date is $20, and the shares are later sold for $25; would the 3.8% be applied to $25-$5 OR $25-$20 ??

Thx.

Re: medicare 3.8% surtax and same day sale of ISO's
Posted by: Kaye Thomas, December 31, 2015 12:52AM
It applies to the capital gain, not the ordinary income. So if this is a DQ, it applies to $25 - $20. But if the stock is held long enough for a qualifying sale, with all treated as capital gain, it applies to the entire capital gain, $25 - $5.

Kaye Thomas
Fairmark.com



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