Reply To: Employee stock options NQSO or ISO after splits

Home Fairmark Forum Taxation of Investments Employee stock options NQSO or ISO after splits Reply To: Employee stock options NQSO or ISO after splits

#37092
Kaye Thomas
Moderator

First be sure you have the correct initial basis for the stock acquired using NQSO. This is the amount paid to exercise the option, increased by the amount of income you reported from exercise of the option. For example, if you paid $5,000 to exercise the option when the shares were worth $65,000, you would have reported $60,000 as additional income from exercise of the option. Your basis for the shares would be $65,000, exactly the same as if you received a cash bonus of $60,000 and used that money, together with $5,000 from savings, to buy $65,000 worth of stock.

Second, most people pay alternative minimum tax (AMT) when they exercise an ISO. Afterwards, they’re usually able to recover some or all of this tax in the form of a credit. In some cases, the trigger for recovering credit is sale of the ISO shares. You say you paid no tax when exercising the ISO, and if that’s the case, you won’t claim any AMT credit. You may want to double check, though.

Now to your question. Stock splits cause whatever basis you have in your shares to be split among all resulting shares. If your stock had basis of $20 per share before a 2-for-1 split, you end up holding twice as many shares with a basis of $10 per share. Also, the number of shares in each category doubled. In your example, certificate C1 includes 1,000 shares that would be treated as coming from exercise of NQSO and 3,000 shares from ISO . . . and so on for the other splits.