The tax forms your equity generates

Equity compensation generates more paperwork than almost anything else an ordinary taxpayer encounters, and the paperwork arrives in a confusing order. Some of it is informational and triggers nothing. Some of it arrives years after the event it describes. One piece of it is, for a large fraction of recipients, simply wrong in a way that costs money.

What follows is what each form actually tells you, why it exists, and which numbers on it matter. The short version: the ones from your employer are usually right and usually ignorable in the year they arrive, and the one from your broker needs checking before you file.

Form 3921 — you exercised incentive stock options

Your employer files this for every ISO exercise and sends you a copy by the end of January. It reports the date of grant, the date of exercise, the exercise price per share, the fair market value per share on the exercise date, and the number of shares.

Exercising an incentive stock option is not a taxable event for regular income tax, so nothing on this form goes onto your Form 1040 directly. What it does is supply the two figures that drive everything else: the spread between the exercise price and the value on that day is your alternative minimum tax adjustment, and the value on that day becomes your AMT cost basis in the shares — permanently different from your regular basis, which stays at the strike.

That divergence is why this form matters long after the year it covers. When you eventually sell, you will need the exercise-date value to compute the AMT gain, and the only reliable record of it is this piece of paper.

Form 3922 — you bought shares through an ESPP

The employee stock purchase plan equivalent, filed on the first transfer of legal title to shares acquired under a §423 plan. It reports the grant date, the exercise date, the fair market value on each of those dates, and the price you actually paid.

Like Form 3921 it triggers nothing on its own. Unlike Form 3921, one of its numbers is genuinely obscure and impossible to reconstruct later: the fair market value on the grant date, which is the start of the offering period rather than the day you bought anything.

That figure decides how much of an eventual qualifying disposition is ordinary income, because the discount is measured on the grant-date price rather than the purchase price. People routinely discard these forms as junk mail and then cannot work out their own tax years later.

Form 1099-B — the one to check before you file

When you sell shares, your broker reports the proceeds and, usually, the cost basis. For shares acquired through equity compensation that basis is very often understated, and frequently reported as zero.

The reason is structural rather than negligent. Since 2014, brokers have been permitted — in many cases required — to report only the amount you literally paid, excluding the compensation income your employer already put on your W-2. Your employer knows that number and your broker does not, and no rule makes them reconcile.

The consequence is that a naive filing taxes the same money twice: once as wages when the shares vested or the option was exercised, and again as capital gain when they are sold. On a large RSU vest the overpayment runs into five figures.

Check the basis on every 1099-B covering equity compensation before filing. For RSUs the correct basis is the share price on the vesting date. For non-qualified options it is the value at exercise. For a disqualifying ESPP disposition it is the purchase price plus the discount already taxed as income.

The fix is Form 8949: report the basis as your broker did, then enter adjustment code B with the correction. This is routine, expected, and the reason the adjustment column exists.

Forms 6251 and 8801 — the alternative minimum tax pair

Form 6251 computes alternative minimum tax. If you exercised incentive stock options and held the shares past the year end, the spread from your Form 3921 lands here as an adjustment, and it is the most common reason an ordinary salaried person encounters this form at all.

Form 8801 is its counterpart and it runs in the opposite direction. Alternative minimum tax paid on a deferral item — and the ISO spread is one — creates a minimum tax credit that carries forward indefinitely. Form 8801 tracks the balance and computes how much of it you may claim this year.

The answer is usually much less than people expect. The credit is limited each year to the excess of your regular tax over your tentative minimum tax, which for most salaries is a few thousand dollars. A six-figure credit can take a decade to recover, and Form 8801 is the only running record of what remains.

Your W-2, and what is already in it

Most equity income never appears on a separate form at all — it is already inside box 1 of your W-2, mixed in with salary. That is true of RSU vesting, non-qualified option exercises, and the ordinary income portion of a disqualifying ESPP or ISO disposition.

Two markers help you find it. Box 12 code V reports income from the exercise of non-statutory stock options. Box 14 is unregulated and employers often use it to break out RSU or ESPP amounts, though the labelling varies and means whatever that employer decided it means.

The practical point is that this income is already reported and already withheld against, however inadequately. What you are checking at filing time is not whether it was reported but whether the corresponding cost basis followed it — which brings you back to the 1099-B.

A disqualifying disposition of incentive stock option shares is the exception that surprises people. The income appears on your W-2, but §421(b) requires no withholding against it, so a large addition arrives with nothing set aside.

Questions

Sources

Everything asserted above traces to one of these. We cite the statute, the regulation, or the IRS directly — never another commentary site.

• IRS Form 3921 — exercise of an incentive stock option under §422(b)
• IRS Form 3922 — transfer of stock acquired through an employee stock purchase plan
• IRS Form 6251 — alternative minimum tax for individuals
• IRS Form 8801 — credit for prior year minimum tax
• IRS Form 8949 — sales and other dispositions of capital assets
• IRC §1012 — basis of property is its cost, including amounts already taxed as compensation

Related calculators

• ISO AMT CalculatorExercising an incentive stock option produces no regular taxable income and can still produce a very large tax bill.
• ESPP Disposition CalculatorSell your employee stock purchase plan shares too early and the whole discount is ordinary income — even if you sold at a loss.
• AMT Credit Recovery CalculatorPaying alternative minimum tax on an ISO exercise creates a minimum tax credit that never expires.
• Tender Offer & Secondary Sale CalculatorA tender offer is usually the first time startup equity turns into money.