How Corporate Executives Can Avoid Double Taxation on Non-Qualified Stock Options
If you're a corporate executive who exercised non-qualified stock options (NQSOs), your W-2 (Box 12, Code V) already includes the ordinary income portion. If your 1099-B isn’t adjusted for this, you may pay tax twice. Check your cost basis, and amend past returns if needed.
Key Points:
Exercising stock options can trigger unexpected tax complexity. If not reported correctly, you could end up paying tax twice on the same income.
The IRS doesn’t fix this mistake for you. A misreported cost basis on Form 1099-B is a common—and costly—error, especially when your W-2 already includes the income.
There may still be time to correct past returns. If you've overpaid taxes in prior years due to this issue, you may be eligible to file an amended return and recoup the difference.
The Common Pitfall: Double Counting Ordinary Income
When you exercise NQSOs, your employer typically includes the income from the exercise on your W-2, found in Box 12 with Code V. (See example partial W2 below.) This income is taxed as ordinary income and subject to payroll taxes.
But your broker or custodian will also issue a Form 1099-B, reporting the stock sale—often with a low or unadjusted cost basis. If your tax preparer isn’t familiar with equity compensation, they might double count the income, inflating your tax bill.
Why Does This Happen?
Many tax preparers may treat the 1099-B at face value and don’t adjust the cost basis properly. Here’s why that’s a mistake:
W-2 Already Captures the Income: Your company reports the income portion from the NQSO exercise on your W-2.
1099-B Usually Shows Only the Exercise Price as Basis: Brokers often report just the raw purchase price (exercise price), not the FMV already taxed.
Result: You Overpay Capital Gains Tax: Without adjusting the cost basis, you effectively pay tax twice—once as ordinary income, once as capital gain.
The Fix: Adjust Your Cost Basis Correctly
When you report the sale on Schedule D and Form 8949, make sure your cost basis includes:
The exercise price of the shares
The amount already taxed via your W-2
Failing to make this adjustment means paying capital gains tax on income you’ve already paid ordinary income tax on.
What If You Overpaid in a Prior Year?
You can fix it. The IRS allows you to file an amended return (Form 1040-X) for up to three years after the original filing date. If this mistake has been made before, a refund may be on the table.
How to Avoid This in the Future
Work with a specialist. Not all CPAs or tax preparers are experienced in equity comp.
Keep thorough records. Store your W-2, 1099-Bs, and exercise confirmations.
Double-check your return. Ensure Schedule D and Form 8949 reflect an adjusted cost basis.
Maximizing Your Stock Option Benefits by Avoiding Tax Pitfalls
Exercising NQSOs can be a powerful wealth-building event—but if misreported, it can result in significant tax leakage. By understanding how your stock options are taxed and ensuring your cost basis reflects what’s already reported on your W-2, you can avoid overpaying and keep more of what you’ve earned.
If you’ve already exercised options and want a second opinion or need help integrating equity compensation into your broader financial strategy, we’re here to help.
How Capstone Can Help
At Capstone, we understand the intricate tax implications of equity compensation. With deep experience in serving corporate executives,. we help you navigate the complexities of non-qualified stock option exercises with the goal of supporting accurate tax reporting and enhancing your overall financial strategy.
Our goal is to help you make informed decisions, align your equity compensation with your broader financial goals, and reduce the risk of tax-related surprises.
FAQs About NQSOs and Tax Reporting
What is Box 12 Code V on a W-2?
Code V in Box 12 of your W-2 reports income from the exercise of non-qualified stock options (NQSOs). This amount is already included in your taxable wages.
Why does my 1099-B show a lower cost basis than I expected?
Brokers often report the exercise price (purchase price) as the cost basis, not including the income already reported on your W-2. Without adjusting for this, you may be taxed twice.
How do I correct double taxation from stock option exercises?
You need to adjust your cost basis on IRS Form 8949 and Schedule D to reflect the income already included on your W-2. This ensures you’re not taxed again as capital gains.
Can I amend a past return if I make this mistake?
Yes. You can file an amended return (Form 1040-X) for up to three years after the original filing. Many executives have recovered overpaid taxes this way.
Disclosures:
This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review by contacting us at capstonefinancialadvisors@capstone-advisors.com or (630) 241-0833.