Q: What Information Do I Need to File My Tax Return?
Q: How can I determine my capital gain or
loss on shares sold as part of an exercise?
Q: What is the cost (tax) basis of shares I obtained through an exercise?
Q: Does the Tax Reporting Statement show the options that I exercised?
education / taxes
released december 2010
Filing Your Tax Forms
After Exercising Your
Stock Options
summary
Morgan Stanley Smith Barney has prepared the
following information to assist you in understanding
the tax consequences involved when exercising a NonQualified Stock Option through the “cashless exercise”
method. Also included are sample forms and an
explanation of the information needed to assist you in
reporting the exercise of Non-Qualified Stock Options
on your individual income tax return for 2010. Please
retain all forms sent to you by Morgan Stanley
Smith Barney to use when preparing your tax return.
Note: This guide is for non-qualified stock options
and does not address Incentive Stock Options.
Q: What information do I need to file
my tax return?
A: The following pages describe the
information you will need when you
prepare your 2010 individual income
tax return (Form 1040). Assemble the
following forms when you are ready to
prepare your tax return:
Morgan Stanley Smith Barney’s Exercise Confirmation Form or Year-End
Exercise Summary Statement
W-2, Wage and Tax Statement from
your employer
Morgan Stanley Smith Barney’s Form
1099-B
IRS Form Schedule D: Capital Gains
and Losses
••
••
••
••
education / taxes
What Information Do I Need to File My Tax Return?
Forms
How to Obtain
Questions?
Stock Option Exercise Confirmation Form
OR
Year-End Exercise Summary Statement
Morgan Stanley Smith Barney mails this to
your home at the time of your original exercise
(Duplicates not available). Morgan Stanley
Smith Barney mails this to your home by
February 15th.*
Call Morgan Stanley Smith Barney’s
Customer Service Department at the 800
number provided on the Tax Reporting
Statement (Form 1099-B).
IRS Form 1099-B
Morgan Stanley Smith Barney sends this to
you by February 15th* of the year following
payment of the net proceeds to you.
Call Morgan Stanley Smith Barney’s
Customer Service Department at the 800
number provided on the Tax Reporting
Statement (Form 1099-B).
Form W-2
Your company will send this to you.
Call your company’s payroll department.
Schedule D (Form 1040)
Visit your local IRS office or call (800) TAX
FORM. You may also obtain this form via the
Internet at WWW.IRS.GOV.
Call your local IRS office or consult your
tax advisor.
* The Emergency Economic Stabilization Act of 2008 changed the effective date for providing Forms 1099 to recipients to February 15th.
Please refer to the back of this brochure for basic information explaining the tax consequences involved when exercising a Non-Qualified Stock Option through
the “cashless exercise” method.
Filing Information
The following example reflects a salary of $30,000 and the exercise of 100
options of ABC Company Stock. The
forms described on the previous page
provide the amounts needed to calculate
your tax liability. The following four
exhibits show you where you can find
the information you need to prepare
your individual tax return and how to
complete Schedule D of your Form 1040.
exhibit 1: sample morgan stanley smith barney exercise confirmation
(same process using the exercise summary statement)
p
g
h
Step 1
Your Gain From Your Sale of
Company Stock (Exhibits #1 & 2)
Your pre-tax gain is located on your
Morgan Stanley Smith Barney Exercise
Confirmation (Exhibit #1, letter (j)). You
can double-check this amount by comparing the number in Box #12 (using
the code “V”) on your W-2 Wage and
Tax Statement Form (Exhibit #2). The
total in Box #1 should equal your wages
($30,000) plus the gain on your option
exercise ($2,000) totaling $32,000.
2
morgan stanley smith barney | 2010
i
j
k
l
m
n
o
The example above is hypothetical and does not necessarily reflect the results
(including transaction costs) of an actual cashless option exercise and sale.
education / taxes
exhibit 2: w-2 wage and tax statement (provided by your company)
V
2,000
exhibit 3: irs form 1040 schedule d captial gains and losses
Step 2
How to complete Your IRS Form
1040, Schedule D (Capital Gains
and Losses), Exhibits 3 and 4
••Column (a)—Description of prop-
erty: Refer to Exhibit # 1 (g), the “Exercise Quantity” and write this amount
and your company name in column (a)
of Exhibit # 3.
Column (b)—Date acquired & (c)
Date sold: Refer to Exhibit # 1 (o), the
“Trade Date” and write this date in columns (b) and (c) of Exhibit # 3. With
a cashless exercise the “Trade Date” is
the date you acquired and sold the stock.
Column (d)—Sales Price: Refer to
Exhibit # 4 (q), the “Gross Proceeds
Less Commissions and Fees” and write
this amount in column (d) of Exhibit
# 3. Illustrated below is the formula
to calculate the sales price. Refer to
Exhibit # 1. Add the Commission (k),
Transaction Fee (l), the Exercise Fee
(m), and the Other Fee (n). Subtract
that total from the Gross Amount (p).
$25.00 + $10.00 + $4.00 + .01 = $39.01
$6,000.00 - $39.01 = $5,960.99
Column (e)—Cost or other basis: Refer to Exhibit # 1 (i) “option cost” and ( j)
“gain.” Add the two amounts and write
the total in column (e) of Exhibit # 3.
Your cost basis is equal to the “Option
Cost” (i) plus the “Gain” ( j).
Column ( f )—Gain or (Loss) for
entire year: Subtract column (e) from
column (d) and enter the result in column ( f ).
••
a
b
c
d
e
f
••
Note: The example shown in Exhibit 3 is based on one exercise. If you conducted
multiple cashless exercises in 2010, you must list each transaction separately on
Schedule D. Gains or losses due to cashless option exercises will be considered
short-term capital gain/loss.
exhibit 4: sample morgan stanley smith barney form 1099-b
MORGAN STANLEY SMITH BARNEY
TAX REPORTING SERVICE CENTER
388 GREENWICH ST
NEW YORK, NY 10013
TAX ID NUMBER: 11-2418191
q
••
••
*In this example the amount reflects a (Loss).
morgan stanley smith barney | 2010
3
education / taxes
The Basics of Exercising a
Non-qualified Stock Option
Through the Cashless
Exercise Program
The cashless exercise of a non-qualified
stock option includes two separate transactions. For tax reporting purposes you
must separate the two transactions. The
first transaction is the exercise of stock
options; the second transaction is the
sale of stock. The exercise of your stock
options creates compensation income
based on the fair market value of the
stock on the date of exercise less your
option cost. Such income constitutes
wages that are subject to employment
taxes and to reporting by your employer
on Form W-2.
You must, however, report the sale
of stock on Schedule D (Form 1040) of
your individual income tax return. The
stock price at the time of sale is used to
determine any short-term capital gain
or loss. Morgan Stanley Smith Barney
prepares and issues you a Form 1099-B
which reports the gross proceeds less
applicable commissions and fees. It is
common for a cashless exercise to create a small short-term capital loss when
taking into account these fees and commissions (see example in Exhibit #3).
This information is intended to simply
explain the transaction involved. All the
information you need regarding your
stock option exercise for filing can be
found on the Exercise Confirmation Form
sent to you by Morgan Stanley Smith
Barney and your Form W-2 provided
by your company. If you have additional
questions, you should contact your tax
advisor for information regarding the
federal (as well as state and local) tax
consequences of your specific transaction.
income you earned upon the exercise
is reported as taxable compensation
(wages) on Form W-2 in Box #1.
Definitions
Fair Market Value: The fair market
Q: Does the Tax Reporting Statement
(Form 1099-B) show the options that
I exercised?
A: No. The options you exercised
are shown on your Morgan Stanley
Smith Barney Exercise Summary or
Confirmation Statement. The Tax
Reporting Statement (Form 1099B) shows proceeds from the sale of
shares you obtained as a result of your
option exercise.
Cashless Exercise Transaction:
Q: How can I determine my capital gain
or loss on shares sold as part of an
exercise?
A: Refer to Exhibit # 3 of this brochure.
value of the stock, at the time of exercise, which will be used to determine
compensation income is defined in your
plan document.
In this type of transaction, no cash outlay is required of the optionee. Instead,
shares of stock are sold to cover all the
participant’s exercise costs, including
the exercise price, employment taxes
and any fees and commissions.
Questions & Answers
Q: When I exercise my stock
options, what is the amount of my
compensation/income and where is it
reported?
A: The amount of your compensation
income is equal to the fair market value of the stock at the time of exercise
less the grant price multiplied by the
number of options you exercised. The
Q: What is the cost (tax) basis of
shares I obtained through an exercise?
A: It is the fair market value of your
company’s stock at the time of exercise,
multiplied by the number of options
exercised.
Q: Can I file a Form 1040EZ or Form
1040A with a Schedule D for a year in
which I exercised stock options?
A: No. You are not permitted to file
a Form 1040EZ or Form 1040A for a
year in which you have sold any stock
in connection with a stock option exercise. Schedule D must be attached to
an optionee’s Form 1040.
Morgan Stanley Smith Barney LLC, its Financial Advisors and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters,
it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the
taxpayer’s particular circumstances from an independent tax advisor.
© 2010 Morgan Stanley Smith Barney LLC. Member SIPC.
2010-PS-2393 CCG24043 6489203 11/10