IRC 6039 Reporting FAQs

IRC 6039 Reporting FAQs

Section 6039 of the Internal Revenue Code (IRC) of 1986 imposes reporting requirements on companies with respect to exercises of Incentive Stock Options (“ISOs”) and transfers of stock acquired through an Employee Stock Purchase Plan Under Section 423(c) of the Internal Revenue Code. In November 2009, the IRS finalized the regulations under Section 6039. The final regulations require companies to file an information return with the IRS and to provide stock plan participants with a copy of the form’s content by January 31st of each year (for the transactions that occurred in the previous calendar year).

Form 3921 is entitled, “Exercise of an Incentive Stock Option Under Section 422(b).” This form is used to report the ISO exercises that an employee executed during the previous calendar year. All pertinent information for calculating taxable income is included on this form. There are six boxes, as summarized below:

Box 1: Grant Date: This is the date that the ISO was granted.
Box 2: Exercise Date: This is the date that a person exercised the ISO (purchased shares of stock pursuant to this option).
Box 3: Exercise Price: This is the price paid for each share of stock purchased through this ISO exercise.
Box 4: Value on Exercise Date: This is the fair market value of the respective company’s stock on the date of exercise, as determined by the company’s stock plan documents.
Box 5: Number of Shares: This is the number of shares exercised (purchased) on the exercise date. This number may or may not equal the number of shares sold, if any, on that date.
Box 6: IF APPLICABLE (only if the recipient is employed by a subsidiary of the company). This box captures the name, address and tax identification number of the parent company, the stock of which was purchased in this ISO exercise. If the recipient is employed by the issuer (parent) company, then this box is left blank.

The OMB Number (Office of Management and Budget) is a control number assigned by the IRS. This number does not factor into personal tax calculations.

The Transaction ID Number is a unique transaction number that the IRS uses to track activity, especially in the event that any corrected forms must be filed. A unique number is assigned to each transaction for this purpose, and it does not factor into personal tax calculations.

Employees should use the information on Form 3921 to assist with calculating income tax obligations for the respective tax year. Employees may wish to provide any tax preparers with a copy of Form 3921. Recipients do NOT need to include a copy of Form 3921 with their tax returns.

Tax treatment for ISOs is governed by IRC Section 422(b). The treatment varies based on how long an individual holds the shares before he/she sells them. Employees are NOT taxed at the time that they exercise ISO shares UNLESS they sell them at the same time. In other words, an ISO exercise alone does not trigger a taxable event; individuals are taxed when they SELL the shares (whether as part of a cashless exercise or otherwise). Thus, if individuals didn’t sell the shares that are reported on their Form 3921 in the respective tax year, then, generally, no taxable income is yet reportable.

Individuals must, however, consider the Alternative Minimum Tax (AMT) adjustment that is triggered if they hold the shares of stock acquired by the exercise of an ISO at the end of the calendar year in which they exercised the ISOs. (If individuals exercise the ISO and sell the ISO shares in the same year, then the AMT adjustment is not triggered.) Due to the complexity of the AMT calculations and rules, SPS/GZ advises that people consult with their tax advisors if they exercised ISOs in the respective calendar year and have not yet sold the ISO shares by the end of that calendar year.

There are essentially two types of dispositions (sales): a “Qualified Disposition” (QD) and a “Disqualified Disposition” (DD). As one might have guessed, a QD is given more favorable tax treatment by the IRS. In order to receive QD tax treatment, an individual must hold the stock acquired by the exercise of his/her ISO beyond the later of (i) one year after the date of exercise AND (ii) two years after the date that the ISO was granted. If individuals do not meet both of these minimum holding requirements, then they will receive DD tax treatment.

No. It is important to note that employers are NOT required to withhold income taxes for the exercise or sale of ISO shares. However, the company is required to record and report to the IRS ordinary income upon the sale of ISO shares if the sale is a DD, and this income is reported on Form W-2. It is important to retain the Form 3921 received from the company for tax preparation purposes.

Form 3922 is entitled “Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c).” This form captures all of the ESPP purchases that an employee executed during the respective calendar year. All pertinent information for calculating taxable income is included on this form. There are eight boxes, as summarized below:
Box 1: Grant Date: This is the first day of the offering period, also referred to as the Subscription Date or Enrollment Date.
Box 2: Exercise (Purchase) Date: This is the date that the shares were purchased under the ESPP.
Box 3: Grant (Subscription) Value: This is the fair market value of the company’s stock on the first day of the offering period as determined under the stock plan documents
Box 4: Exercise (Purchase) Value: This is the fair market value of the company’s stock on the Exercise (Purchase) Date.
Box 5: Exercise (Purchase) Price: This is the actual price at which an employee purchased the shares on the Exercise (Purchase) Date.
Box 6: Number of Shares: This is the number of shares purchased on the ESPP purchase date.
Box 7: Date of Transfer: This is the date that the purchased shares were first transferred (for example, to the broker). For purposes of this form, the purchase date will usually coincide with the date of transfer.
Box 8: Discounted Price on Subscription Date: This represents the price that an employee would have paid for the shares in the offering had the discounted price been set on the grant (subscription) date. In other words, an employee would apply the purchase plan percentage discount to the fair market value of the stock on the grant date. This information is helpful in calculating the “ordinary income” portion of the gain for a “Qualified Disposition” – as explained in Section III below.

Employees should use the information on Form 3922 to assist with calculating the income tax obligations for the respective tax year. Employees may wish to provide any tax preparers with a copy of Form 3922. Recipients do NOT need to include a copy of Form 3922 with their tax returns.

Tax treatment for ESPP transactions varies based on how long an individual held the shares before selling them. Individuals are NOT taxed at the time that they purchase the shares under the ESPP (which the IRS refers to as exercising an option to purchase the shares) UNLESS they sell them at the same time. Thus, if an individual didn’t sell the shares that are reported on Form 3922 in the respective calendar year, then he/she has no taxable income in that year from the ESPP purchase.

There are essentially two types of dispositions (sales): a “Qualified Disposition” (QD) and a “Disqualified Disposition” (DD). As one might have guessed, a QD is given more favorable tax treatment by the IRS. In order to receive QD tax treatment, an individual must hold the stock acquired by the purchase of ESPP shares beyond the later of (i) one year after the purchase of the shares AND (ii) two years after the date that the ESPP “option” was granted to (i.e. the beginning of the ESPP offering period). If individuals do not meet these minimum holding requirements, then they will receive DD tax treatment.

For a DD, the company is required to record and report to the IRS the ordinary income component on the employee’s Form W-2. However, failure of employees to return disposition surveys in a timely manner can impact the ordinary income being properly reflected on the Form W-2. Please note that employees must still compute their capital gain or loss component on the sale of the ESPP shares and report this amount on their tax returns shares.

The deadline for distributing the statements to participants with regard to both ISOs and ESPPs is January 31st. The deadlines to file Forms 3921 and 3922 with the IRS are February 28 for paper filers and March 31 for electronic filers.

You are required to file Forms 3921 and 3922 electronically if you have 250 or more returns to file with the IRS.

Penalties are assessed per each required form, and range from $30 to up to $100 per form for failure to file or for an incorrect filing, and $50 for failure to furnish the employee a correct information statement, subject in each case to certain annual maximum caps. The penalties are higher for noncompliance due to intentional disregard of the requirements and in such circumstances, there is no cap on maximum aggregate penalties.