2018 GUIDE TO TAX REPORTING FOR US EQUITY

Transcription

1 2018 GUIDE TO TAX REPORTING FOR US EQUITY

2 A PRACTICAL GUIDE TO TAX REPORTING FOR US-BASED EQUITY AWARDS Introduction This guide is designed for US-based taxpayers who receive US equity awards. We ll walk you through the impact of different types of equity on your tax reporting, what tax forms are needed to update your tax return, and what you need to know in order to report equity-related income properly. Please note this guide is geared towards equity awards for US public companies. Tax implications for participants of private companies or those based outside of the US and subject to reporting in other jurisdictions are touched on but not covered extensively. This guide addresses the most common scenarios for US participants and equity awards. It is not intended as professional tax advice or to serve as an exhaustive reference on tax reporting rules. Always consult your professional tax advisor for guidance related to your specific tax situation. Table of Contents 1. Quick Reference: Tax Form Issuance Deadlines 2. When Does a Tax Reporting Obligation Arise? 3. If I Have Incentive Stock Options ( ISOs ) 4. If I Have Non-qualified Stock Options ( NQSOs ) 5. If I Have Restricted Stock Awards ( RSAs ) 6. If I Have Restricted Stock Units ( RSUs ) 7. If I Participate in a Section 423 Employee Stock Purchase Plan ( ESPP ) 8. If I Participate in a Non-qualified Employee Stock Purchase Plan ( ESPP ) 9. If I Have Stock Appreciation Rights ( SARs ) 10. If I Receive Dividends 11. Other Information I Might Want to Know 12. When and How are Tax Forms Issued? 13. How Do I Complete the Schedule D and Form 8949 for Reporting Stock Sales? 14. What If I Have Additional Questions? 2018 GUIDE TO TAX REPORTING FOR US EQUITY 2

3 1. Quick Reference: Tax Form Issuance Deadlines FORM TYPE TARGET MAILING DATE OR ONLINE POSTING DATE FOR PARTICIPANTS Form 1099-B: Proceeds from Broker and Barter February 15, 2019* Form 1099-DIV: Receipt of Dividends or Distributions February 15, 2019* Form 3921: Exercise of an Incentive Stock Option under Section 422(b) Form 3922: Transfer of Stock Acquired Through an Employee Stock Purchase Plan under Section 423(c) Form 1042-S: Receipt of Dividends or Distributions for Non-US Residents January 31, 2019 January 31, 2019 March 15, 2019 *When issued as part of a composite Form 1099-B/Form 1099-DIV; otherwise January 31, 2019 The sections throughout this guide refer to the types of forms that are applicable for different types of equity. The deadline noted above indicates the date by which the online copy of the form will be posted to your Shareworks account or postmarked in the mail. Refer to When and How are Tax Forms Issued? for more information on accessing your tax forms. 2. When Does a Tax Reporting Obligation Arise? There are a few scenarios where you might not have a tax reporting obligation in the current tax year. Examples include: You receive a new stock option, restricted stock award/units, or other type of grant You exercise an Incentive Stock Option You purchase shares under a Section 423 Employee Stock Purchase Plan A tax reporting obligation usually arises when the following activities occur: Equity Type Incentive Stock Options ( ISOs ) Non-qualified Stock Options ( NQSOs ) Restricted Stock Awards ( RSAs ) Action You sell shares received from an ISO exercise (regular income tax obligation) You exercise an ISO and hold the shares through the end of the same calendar year (Alternative Minimum Tax obligation) You exercise a NQSO (regular income tax obligation) You sell shares received from a NQSO exercise at a later date (capital gains/ loss obligation) You receive shares through vesting (regular income tax obligation) You make a Section 83(b) election within 30 days of grant (regular income tax obligation) You sell shares received from a RSA at a later date (capital gains/loss obligation) 2018 GUIDE TO TAX REPORTING FOR US EQUITY 3

4 Equity Type Restricted Stock Units ( RSUs ) Section 423 Employee Stock Purchase Plan ( ESPP ) Non-qualified Employee Stock Purchase Plan ( ESPP ) Stock Appreciation Rights ( SARs ) Dividend income Action You receive shares through vesting (regular income tax obligation) You sell shares received from a RSU at a later date (capital gains/loss obligation) You sell shares received under a Section 423 ESPP (regular income tax and capital gains/loss obligation) You purchase shares under a Non-qualified ESPP at a discount (regular income tax obligation) You sell shares purchased under a Non-qualified ESPP at a later date (capital gains/loss obligation) You exercise a SAR (regular income tax obligation) If stock settled: You sell shares received from a SAR exercise at a later date (capital gains/loss obligation) You receive dividend income on shares held or on outstanding unvested RSAs If any of the above scenarios happened to you this year, read on this tax guide will help to prepare you for the tax reporting that s to come. Refer to the associated sections throughout this guide for more information on how to report relevant activity. Also note that in some cases, there may be more than one point of tax obligation to know about. 3. If I Have Incentive Stock Options ( ISOs ) a. What is an Incentive Stock Option and how do i know if i have this type of equity? An Incentive Stock Option ( ISO ) is a type of equity grant that meets specific tax qualification criteria and reporting requirements under Section 422(b) of the Internal Revenue Code. This type of stock option usually confers tax-related privileges and is not subject to employment taxes (Social Security or Medicare) or tax withholding by the company at the time of exercise. Refer to your grants and awards within your Shareworks account to determine if you have this type of equity. b. Do I have a tax reporting obligation when I am granted an Incentive Stock Option? No, ISOs do not incur a tax obligation at the time of grant. c. Do I have a tax reporting obligation when I exercise an Incentive Stock Option? No, ISOs generally do not incur a tax obligation at the time of exercise. However, if you do not sell the shares within the same calendar year as the exercise, the exercise itself may be subject to the Alternative Minimum Tax ( AMT ) rules that require separate tax reporting. A full discussion of AMT is outside the scope of this publication, so consult your tax professional for more information if this situation applies to you. Note: By January 31 following the year of exercise, you will receive a Form 3921 providing details related to the exercise. This form is for informational purposes only and is also filed by your company with the Internal Revenue Service for their records. Keep this form handy, as it provides you with information needed when you have to report a sale of these shares or the exercise under the AMT rules. d. Do I have a tax reporting obligation when I sell shares acquired from an exercise of an Incentive Stock Option? Yes, the primary taxation obligation for ISOs occurs when the shares are sold. Here s what you need to know about a sale of shares acquired from an exercise of an ISO: 2018 GUIDE TO TAX REPORTING FOR US EQUITY 4

5 The gain on sale date (sale price minus grant price) is subject to federal and applicable state taxes and may qualify as ordinary income, capital gains, or both. Employment taxes (Social Security and Medicare) do not apply to ISO income. Your company is not required to withhold taxes at the time of sale, nor are you required to remit any taxes at this time. Payment can wait until the time you file your tax return for the year. Consult your professional tax advisor about the need to pay estimated taxes or to put money aside to pay with your tax return. How the income is taxed depends on how long you held the shares: If you held the shares less than 12 months after exercise or less than 24 months from grant, this is considered a disqualifying disposition. Refer to the chart below to understand the tax reporting consequences. If you held the shares longer than 12 months after exercise and more than 24 months from grant, this is considered a qualifying disposition. Refer to the chart below to understand the tax reporting consequences. Disposition Type Disqualifying Ordinary Income Reported on Your Form W-2 for the Tax Year in Which the Sale Occurred The lesser of the gain on sale date (sale price minus grant price) OR gain on exercise date (fair market value on exercise date minus grant price) Capital Gains Income Reported on your Schedule D for the Tax Year in Which the Sale Occurred Any additional gain on the sale above the amount reported on your Form W-2 = short-term capital gains Qualifying $0 100% of the gain or loss on sale date (sale price minus grant price) = longterm capital gains or loss Note: If your Incentive Stock Option exercise triggers the AMT, you also need to report the sale separately under the AMT rules. e. What forms do I need to report Incentive Stock Option transactions on my tax return? There are four statements you need to collect: Form Type Information Provided Timing of Issuance/Retrieval Form 3921 Form W-2 Information related to the initial exercise, used to complete the transaction information on your tax return Ordinary income for any disqualifying dispositions reported Year of exercise Year of sale Form 1099-B Information related to the sale of shares Year of sale Transaction Statement from Shareworks Information related to the initial exercise and subsequent sale (if shares were sold through your Shareworks account) Year of sale Refer to When and How are Tax Forms Issued? for more information on these statements. Refer to Question g below for information regarding AMT reporting GUIDE TO TAX REPORTING FOR US EQUITY 5

6 f. When I sell shares from an ISO exercise, how do I report the transaction on my tax return? There are two components of income that may need to be reported related to a sale of shares exercised from an ISO. The first is ordinary income, the second is capital gains. Question d above shows the calculation of ordinary income and capital gains for ISO sales. Ordinary income is reported on your Form W-2 by your company, while any capital gains/loss must be reported by you on your tax return on the Schedule D. When completing the Schedule D to report the sale and the supporting Form 8949 to provide details of the sale transaction, make sure the Form 8949 reflects the adjusted cost basis for the shares to include any ordinary income already included on your Form W-2; this ensures you are not double-taxed for that amount. This also enables you to calculate any additional capital gains income related to the sale that may be taxable. Note: These forms are part of your tax return filing and are not provided by or made available through Solium. Refer to How Do I Complete the Schedule D and Form 8949 for Reporting Stock Sales? for more information on these forms and to view samples. g. Are there other tax ramifications associated with an Incentive Stock Option exercise or sale? If you exercise an ISO and do not sell the shares in the same calendar year, the recognized income may be subject to AMT even though the shares have not yet been disposed. Consult your professional tax advisor about the need to complete Form 6251 if this situation applies to you, as discussion of the AMT is outside the scope of this guide. There is also a tax exception for residents/taxpayers of Pennsylvania, which does not recognize the federal treatment of ISOs. Your company is obligated to report income and withhold taxes at the time of exercise for Pennsylvania state tax purposes, similar to the treatment of a Non-qualified Stock Option exercise. h. I received a disposition survey related to my Incentive Stock Options what is this form and why did I receive it? You received a disposition survey because our records indicate you exercised an ISO and transferred the shares to another broker. The form provides a way for you to report if the shares were sold, so your company will know whether to report any income associated with the sale on your Form W-2 for the year. Failure to report dispositions correctly on your tax forms and filing return may result in Internal Revenue Service penalties and fees to you and/or your company, so please complete and return the form in a timely manner if you sold these shares in Disposition surveys may be mailed or posted to your Shareworks account if you have elected to receive taxrelated forms electronically. 4. If I Have Non-qualified Stock Options ( NQSOs ) a. What is a Non-qualified Stock Option and How Do I Know If I Have This Type of Equity? A Non-qualified Stock Option ( NQSO ) is a type of equity grant that does NOT meet specific tax qualification criteria and reporting requirements under Section 422(b) of the Internal Revenue Code. This type of stock option is subject to federal, applicable state, and employment tax (Social Security and Medicare) withholding by the company at the time of exercise. Refer to your grants and awards within your Shareworks account to determine if you have this type of equity. b. Do I have a tax reporting obligation when I am granted a Non-qualified Stock Option? No, NQSOs do not incur a tax obligation at the time of grant. c. Do I have a tax reporting obligation when I exercise a Non-qualified Stock Option? Yes, the primary income tax obligation for NQSOs occurs when the shares are exercised. Here s what you need to know about an exercise of a NQSO: The gain on exercise date (fair market value on exercise date minus grant price) is considered ordinary income and is subject to federal, applicable state, and employment taxes (Social Security and Medicare). Your company is required to withhold these taxes at minimum statutory rates at the time of exercise. Both the income realized and tax withholding amounts are reported on your Form W-2 for the year of exercise GUIDE TO TAX REPORTING FOR US EQUITY 6

7 If you choose to sell the shares at a later date, the shares will now have an adjusted or stepped-up cost basis equal to the grant price PLUS the ordinary income that was reported on your Form W-2 as a result of the exercise. The adjusted cost basis is different than the simplified cost basis, which is the grant price only. If you sell the shares at a price lower than the adjusted cost basis, the difference is treated as a capital loss. d. Do I have a tax reporting obligation when I sell shares acquired from an exercise of a Non-qualified Stock Option? If you exercise and hold the shares, then sell at a later date, you incur a second tax reporting obligation at the time of sale for reportable capital gains or loss. Here s what you need to know about a sale of shares acquired from an exercise of a NQSO: The gain on sale date (sale price minus adjusted cost basis) is considered capital gains and is subject to federal and applicable state taxes. Adjusted cost basis is equal to the grant price PLUS the ordinary income that was reported on your Form W-2 as a result of the exercise. Your company is not required to withhold taxes at the time of sale, nor are you required to remit any taxes at this time. Payment can wait until the time you file your tax return for the year. Consult your professional tax advisor about the need to pay estimated taxes or to put money aside to be able to remit this payment with your tax return. Whether the income is considered short- or long-term capital gains depends on how long you held the shares after exercise. If the shares were held at least twelve months plus one day from exercise, the income is treated as long-term capital gains. Otherwise the income is short-term capital gains. e. What forms do I need to report Non-qualified Stock Option transactions on my tax return? There are three statements you need to collect: Form Type Information Provided Timing of Issuance/Retrieval Form W-2 Ordinary income associated with the exercise Year of exercise Form 1099-B Information related to the sale of shares Year of sale Transaction Statement from Shareworks Information related to the initial exercise and subsequent sale (if shares were sold through your Shareworks account) Year of exercise Year of sale Refer to When and How are Tax Forms Issued? for more information on these statements. f. When I sell shares from a Non-qualified Stock Option exercise, how do I report the transaction on my tax return? There are two components of income that may need to be reported related to a sale of shares exercised from a NQSO. The first is ordinary income, the second is capital gains. Ordinary income is reported on your Form W-2 by your company for the year of exercise, while any capital gains income must be reported by you on your tax return on the Schedule D for the year of sale. These transactions and the resulting reporting may occur in the same year or different years. When completing the Schedule D to report the sale and the supporting Form 8949 to provide details of the sale transaction, make sure the Form 8949 reflects the adjusted cost basis for the shares to include any ordinary income already included on your Form W-2; this ensures you are not double-taxed for that amount. This also enables you to calculate any additional capital gains income related to the sale that may be taxable. Note: These forms are part of your tax return filing and are not provided by or made available through Solium. Refer to How Do I Complete the Schedule D and Form 8949 for Reporting Stock Sales? for more information on these forms and to view samples GUIDE TO TAX REPORTING FOR US EQUITY 7

8 5. If I Have Restricted Stock Awards ( RSAs ) a. What is a Restricted Stock Award and How Do I Know If I Have This Type of Equity? A Restricted Stock Award ( RSA ) is a type of equity grant that provides you with a certain number of shares over a specified amount of time, usually at no cost to you. Shares subject to a RSA are typically set aside in your name at the time of grant and may be eligible to receive dividends (if applicable) and voting rights before the shares are earned. This type of award is subject to federal, applicable state, and employment (Social Security and Medicare) tax withholding by the company at the time of vesting. Refer to your grants and awards within your Shareworks account to determine if you have this type of equity. b. Do I have a tax reporting obligation when I am granted a Restricted Stock Award? No, RSAs do not incur a tax obligation at the time of grant. The only exception occurs if you make a Section 83(b) election within 30 days of grant, which moves the income tax obligation date to the grant date from the vest date. Refer to Question g below for more information on Section 83(b) elections. c. Do I have a tax reporting obligation when I receive vested shares from a Restricted Stock Award? Yes, the primary income tax obligation for RSAs occurs when the shares vest and are released to you. Here s what you need to know about a vesting of RSAs: The gain on vest date (fair market value on vest date minus grant price, which is usually $0) is considered ordinary income and is subject to federal, applicable state, and employment taxes (Social Security and Medicare). Your company is required to withhold these taxes at minimum statutory rates at the time of vesting. Both the income realized and tax withholding amounts are reported on your Form W-2 for the year of vesting. If you choose to sell the shares at a later date, the shares will now have an adjusted or stepped-up cost basis equal to the grant price PLUS the ordinary income that was reported on your Form W-2 as a result of the vesting. The adjusted cost basis is different than the simplified cost basis, which is the grant price only. If you sell the shares at a price lower than the adjusted cost basis, the difference is treated as a capital loss. d. Do I have a tax reporting obligation when I sell shares acquired from a Restricted Stock Award? If you hold the shares after vesting, then sell at a later date, you incur a second tax reporting obligation at the time of sale. Here s what you need to know about a sale of shares acquired from a RSA: The gain on sale date (sale price minus adjusted cost basis) is considered capital gains and is subject to federal and applicable state taxes. Adjusted cost basis is equal to the grant price PLUS the ordinary income that was reported on your Form W-2 as a result of the vesting. Your company is not required to withhold taxes at the time of sale, nor are you required to remit any taxes at this time. Payment can wait until the time you file your tax return for the year. Consult your professional tax advisor about the need to pay estimated taxes or to put money aside to be able to remit this payment with your tax return. Whether the income is considered short- or long-term capital gains depends on how long you held the shares after vesting. If the shares were held at least twelve months plus one day from vesting, the income is treated as long-term capital gains. Otherwise the income is short-term capital gains. If you sell the shares at a price lower than the adjusted cost basis, the difference is treated as a capital loss GUIDE TO TAX REPORTING FOR US EQUITY 8

9 e. What forms do I need to report Restricted Stock Award transactions on my tax return? There are three statements you need to collect: Form Type Information Provided Timing of Issuance/Retrieval Form W-2 Ordinary income associated with the vesting Year of vesting Form 1099-B Information related to the sale of shares Year of sale Transaction Statement from Shareworks Information related to the initial vesting and subsequent sale (if shares were sold through your Shareworks account) Year of exercise Year of sale Refer to When and How are Tax Forms Issued? for more information on these statements. f. When I sell shares from a Restricted Stock Award, how do I report the transaction on my tax return? There are two components of income that may need to be reported related to a sale of shares received from a RSA. The first is ordinary income, the second is capital gains. Ordinary income is reported on your Form W-2 by your company for the year of vesting, while any capital gains income must be reported by you on your tax return on the Schedule D for the year of sale. These transactions and the resulting reporting may occur in the same year or different years. When completing the Schedule D to report the sale and the supporting Form 8949 to provide details of the sale transaction, make sure the Form 8949 reflects the adjusted cost basis for the shares to include any ordinary income already included on your Form W-2; this ensures you are not double-taxed for that amount. This also enables you to calculate any additional capital gains income related to the sale that may be taxable. Note: These forms are part of your tax return filing and are not provided by or made available through Solium. Refer to How Do I Complete the Schedule D and Form 8949 for Reporting Stock Sales for more information on these forms and to view samples. g. Are there other tax ramifications associated with a Restricted Stock Awards? RSAs offer a unique ability to transfer the primary tax obligation timing from vest to grant under Internal Revenue Code Section 83(b) rules. To do so, you must submit a Section 83(b) election within 30 days of the grant date to your company. As a result, you will incur a tax obligation for ordinary income based on the spread on grant date (fair market value on grant date minus grant price, which is usually $0). Your company will also be required to collect federal, applicable state, and employment (Social Security and Medicare) taxes on this amount at that time. Filing a Section 83(b) election is a tax minimization strategy that has both pros and cons, so always consult your professional tax advisor for guidance relative to your own situation before deciding whether to make this election. 6. If I Have Restricted Stock Units ( RSUs ) a. What are Restricted Stock Units and How Do I Know If I Have This Type of Equity? Restricted Stock Units ( RSUs ) are a type of equity grant that converts to a certain number of shares once earned, usually over a specified amount of time and at no cost to you. Shares subject to RSUs are not issued until the shares vest and are not eligible to receive dividends and voting rights before the shares are earned. This type of award is subject to federal, applicable state, and employment (Social Security and Medicare) tax withholding at the time of vesting. Refer to your grants and awards within your Shareworks account to determine if you have this type of equity GUIDE TO TAX REPORTING FOR US EQUITY 9

10 b. What is the tax treatment for Restricted Stock Units? Generally the tax treatment of RSUs is the same as RSAs. The only exception is the ability to file a Section 83(b) election, which is NOT available for RSUs. RSUs also may have deferral options which enable you to defer receipt of shares to a later date, as well as the associated withholding of federal and applicable state taxes. Refer to Question b under Other Information I Might Want to Know for more information on deferrals. 7. If I Participate in a Section 423 Employee Stock Purchase Plan ( ESPP ) a. What is a Section 423 Employee Stock Purchase Plan and How Do I Know If I Have This Type of Equity? A Section 423 Employee Stock Purchase Plan ( ESPP ) is a type of benefit program that meets specific tax qualification criteria and reporting requirements under Section 423(b) of the Internal Revenue Code. Participation is usually in the form of active enrollment and payroll deductions over time, with shares purchased on specific dates and often at a discount. This type of program usually confers tax-related privileges and is not subject to employment (Social Security or Medicare) taxes or withholding by the company at the time of purchase. Refer to your Shareworks account to determine if you are participating in this type of plan. b. Do I have a tax reporting obligation when I enroll in a Section 423 Employee Stock Purchase Plan? No, you do not incur a tax obligation at the time of enrollment. c. Do I have a tax reporting obligation when I purchase shares from a Section 423 Employee Stock Purchase Plan? No, generally you do not incur a tax obligation at the time of purchase. Note: By January 31 following the year of purchase, you will receive a Form 3922 providing details related to the purchase. This form is for informational purposes only and is also filed by your company with the Internal Revenue Service for their records. Keep this form handy, as it provides you with information needed when you have to report a sale of these shares. d. Do I have a tax reporting obligation when I sell shares acquired from a Section 423 Employee Stock Purchase Plan? Yes, the primary income tax obligation for a Section 423 ESPP occurs when the shares purchased under the plan are sold. Here s what you need to know about a sale of shares acquired from a Section 423 ESPP: The gain on sale date (sale price minus purchase price) is subject to federal and applicable state taxes and may qualify as ordinary income, capital gains, or both. Employment taxes (Social Security and Medicare) do not apply to Section 423 Employee Stock Purchase Plan income. Your company is not required to withhold these taxes at the time of sale, nor are you required to remit any taxes at this time. Payment can wait until the time you file your tax return for the year. Consult your professional tax advisor about the need to pay estimated taxes or to put money aside to pay with your tax return. How the income is taxed depends on how long you held the shares: If you held the shares less than 12 months after purchase or less than 24 months after the offering date for the offering in which the shares were purchased, this is considered a disqualifying disposition. Refer to the chart below to understand the tax reporting consequences. If you held the shares longer than 12 months after purchase and more than 24 months after the offering date for the offering in which the shares were purchased, this is considered a qualifying disposition. Refer to the chart below to understand the tax reporting consequences GUIDE TO TAX REPORTING FOR US EQUITY 10

11 Disposition Type Disqualifying Qualifying Ordinary Income Reported on Your Form W-2 for the Tax Year in Which the Sale Occurred The gain on purchase date (fair market value on purchase date minus purchase price) The lesser of the gain on sale date (sale price minus purchase price) OR the discount element on the offering date of the offering in which the shares were purchased Capital Gains Income Reported on your Schedule D for the Tax Year in Which the Sale Occurred Any additional gain on the sale above the amount reported on your Form W-2 = short-term capital gains Any additional gain on the sale above the amount reported on your Form W-2 = long-term capital gains e. What forms do I need to report Section 423 Employee Stock Purchase Plan transactions on my tax return? There are four statements you need to collect: Form Type Information Provided Timing of Issuance/Retrieval Form 3922 Form W-2 Information related to the initial purchase, used to complete the transaction information on your tax return Ordinary income for any disqualifying dispositions reported Year of purchase Year of sale Form 1099-B Information related to the sale of shares Year of sale Transaction Statement from Shareworks Information related to the initial purchase and subsequent sale (if shares were sold through your Shareworks account) Year of sale Refer to When and How are Tax Forms Issued? for more information on these statements. f. When I sell shares from a Section 423 Employee Stock Purchase Plan, how do I report the transaction on my tax return? There are two components of income that may need to be reported related to a sale of shares purchased from a Section 423 ESPP. The first is ordinary income, the second is capital gains. Question d above shows the calculation of ordinary income and capital gains for Section 423 ESPP sales. Ordinary income is reported on your Form W-2 by your company, while any capital gains income must be reported by you on your tax return on the Schedule D. When completing the Schedule D to report the sale and the supporting Form 8949 to provide details of the sale transaction, make sure the Form 8949 reflects the adjusted cost basis for the shares to include any ordinary income already included on your Form W-2; this ensures you are not double-taxed for that amount. This also enables you to calculate any additional capital gains income related to the sale that may be taxable. Note: These forms are part of your tax return filing and are not provided by or made available through Solium. Refer to How Do I Complete the Schedule D and Form 8949 for Reporting Stock Sales? for more information on these forms and to view samples GUIDE TO TAX REPORTING FOR US EQUITY 11

12 g. Are there other tax ramifications associated with a Section 423 Employee Stock Purchase Plan purchase or sale of shares? There is a tax exception for residents/taxpayers of Pennsylvania, which does not recognize the federal treatment of Section 423 ESPPs. Your company is obligated to report income and withhold taxes at the time of purchase for Pennsylvania state tax purposes, similar to the treatment of a Non-qualified Stock Option exercise. h. I received a disposition survey related to my Section 423 Employee Stock Purchase Plan shares what is this form and why did I receive it? You received a disposition survey because our records indicate you purchased shares under a Section 423 ESPP and transferred the shares to another broker. The form provides a way for you to report if the shares were sold, so your company will know whether to report any income associated with the sale on your Form W-2 for the year. Failure to report dispositions correctly on your tax forms and filing return may result in Internal Revenue Service penalties and fees to you and/or your company, so please complete and return the form in a timely manner if you sold these shares in Disposition surveys may be mailed or posted to your Shareworks account if you have elected to receive taxrelated forms electronically. 8. If I Participate in a Non-qualified Employee Stock Purchase Plan a. What is a Non-qualified Employee Stock Purchase Plan and How Do I Know If I Have This Type of Equity? A Non-qualified Employee Stock Purchase Plan ( ESPP ) is a type of benefit program that does NOT meet specific tax qualification criteria and reporting requirements under Section 423(b) of the Internal Revenue Code. Participation is usually in the form of active enrollment and payroll deductions over time, with shares purchased on specific dates and often at a discount. This type of award is subject to federal, applicable state, and employment (Social Security and Medicare) tax withholding based on the purchase discount at the time of purchase. Refer to your Shareworks account to determine if you are participating in this type of plan. b. Do I have a tax reporting obligation when I enroll in a Non-qualified Employee Stock Purchase Plan? No, you do not incur a tax obligation at the time of enrollment. c. Do I have a tax reporting obligation when I purchase shares under a Non-qualified Employee Stock Purchase Plan? Yes, the primary income tax obligation for a Non-qualified ESPP occurs when the shares are purchased, assuming there is a discount on purchase. Here s what you need to know about a purchase of discounted shares under a Non-qualified ESPP: The gain on purchase date (fair market value on purchase date minus purchase price) is considered ordinary income and is subject to federal, applicable state, and employment taxes (Social Security and Medicare). Your company is required to withhold these taxes at minimum statutory rates at the time of purchase. Both the income realized and tax withholding amounts are reported on your Form W-2 for the year of purchase. If you choose to sell the shares at a later date, the shares will now have an adjusted or stepped-up cost basis equal to the purchase price PLUS the ordinary income that was reported on your Form W-2 as a result of the purchase. The adjusted cost basis is different than the simplified cost basis, which is the purchase price only. d. Do I have a tax reporting obligation when I sell shares acquired from a Non-qualified Employee Stock Purchase Plan? If you hold the shares, then sell at a later date, you incur a second tax reporting obligation at the time of sale. Here s what you need to know about a sale of shares acquired from a Non-qualified ESPP: The gain on sale date (sale price minus adjusted cost basis) is considered capital gains and is subject to federal and applicable state taxes GUIDE TO TAX REPORTING FOR US EQUITY 12

13 Your company is not required to withhold taxes at the time of sale, nor are you required to remit any taxes at this time. Payment can wait until the time you file your tax return for the year. Consult your professional tax advisor about the need to pay estimated taxes or to put money aside to be able to remit this payment with your tax return. Whether the income is considered short- or long-term capital gains depends on how long you held the shares after purchase. If the shares were held at least twelve months plus one day from purchase, the income is treated as long-term capital gains. Otherwise the income is short-term capital gains. If you sell the shares at a price lower than the adjusted cost basis, the difference is treated as a capital loss. e. What forms do I need to report Non-qualified Employee Stock Purchase Plan transactions on my tax return? There are three statements you need to collect: Form Type Information Provided Timing of Issuance/Retrieval Form W-2 Ordinary income associated with the purchase Year of purchase Form 1099-B Information related to the sale of shares Year of sale Transaction Statement from Shareworks Information related to the initial purchase and subsequent sale (if shares were sold through your Shareworks account) Year of purchase Refer to When and How are Tax Forms Issued? for more information on these statements. f. When I sell shares from a Non-qualified ESPP, how do I report the transaction on my tax return? There are two components of income that may need to be reported related to a sale of shares received from a Non-qualified ESPP. The first is ordinary income, the second is capital gains. Ordinary income is reported on your Form W-2 by your company for the year of purchase, while any capital gains income must be reported by you on your tax return on the Schedule D for the year of sale. These transactions and the resulting reporting may occur in the same year or different years. When completing the Schedule D to report the sale and the supporting Form 8949 to provide details of the sale transaction, make sure the Form 8949 reflects the adjusted cost basis for the shares to include any ordinary income already included on your Form W-2; this ensures you are not double-taxed for that amount. This also enables you to calculate any additional capital gains income related to the sale that may be taxable. Note: These forms are part of your tax return filing and are not provided by or made available through Solium. Refer to How Do I Complete the Schedule D and Form 8949 for Reporting Stock Sales? for more information on these forms and to view samples. 9. If I Have Stock Appreciation Rights ( SARs ) a. What is a stock appreciation right and how do I know if I have this type of equity? A Stock Appreciation Right ( SAR ) is a type of equity grant that works like a Non-qualified Stock Option but may give you the ability to settle in cash, shares, or either at the discretion of the company or you, depending on how the award is structured. If the grant is settled in cash, typically the company pays out the exercise proceeds via payroll; there is no market impact, since no shares are involved in the transaction. This type of award is subject to federal, applicable state, and employment (Social Security and Medicare) tax withholding at the time of exercise. Refer to your grants and awards within your Shareworks account to determine if you have this type of equity. b. What is the tax treatment for Stock Appreciation Rights? If the SAR is settled in cash, the gain on exercise date (fair market value minus grant price) is realized as ordinary income to you. This amount is subject to federal, applicable state, and employment (Social Security 2018 GUIDE TO TAX REPORTING FOR US EQUITY 13

14 and Medicare) tax withholdings at the time of exercise. Your company will report the ordinary income realized and tax withholding amounts on your Form W-2 for the year of exercise and pay the net amount directly to you, usually through payroll. If the SAR is settled in stock, the treatment is similar to that of Non-qualified Stock Options. 10. If I Receive Dividends Dividends are taxable income paid to shareholders usually as a distribution of earnings or cash reserves. If you are a US taxpayer, you will receive a Form 1099-DIV indicating the dividend income paid to you for the tax year. If you had other qualifying transactions on a Form 1099-B, the Form 1099-DIV will be combined with that statement (called a composite statement). You will need to add this income to your tax return and pay any associated taxes at that time. If you are a non-us taxpayer/resident and received dividend income from a US company, you will receive a Form 1042-S. In some cases, tax withholding may have already occurred on this income; the form will indicate these amounts, if applicable. 11. Other Information I Might Want to Know a. What is cost basis and how is it reported on a Form 1099-B when I sell shares? Cost basis refers to the amount paid to acquire shares. There are two components to calculating cost basis: The actual price paid for the shares, such as the purchase price for shares purchased under an employee stock purchase plan or grant price for stock options or restricted stock awards/units Any ordinary income reported on your Form W-2 associated with acquiring the shares Knowing both of these numbers is important for correctly calculating any additional capital gains income and resulting taxes owed on your tax return. The first part (actual price paid) is often referred to as the simplified cost basis. When the simplified cost basis is added to the second component (ordinary income reported), you have the adjusted or stepped-up cost basis. The Form 1099-B, which is issued when you sell shares, reports the simplified cost basis, as required by Internal Revenue Service reporting rules: Equity Type Form 1099-B Cost Basis Reporting Rules Incentive Stock Options or Non-qualified Stock Options Section 423 Employee Stock Purchase Plan or Nonqualified Employee Stock Purchase Plan Stock-settled Stock Appreciation Rights Grant Price only Purchase Price only Grant Price only Note: A Form 1099-B is only required to show cost basis for shares acquired on or after January 1, If you sell shares acquired prior to that date and your Form 1099-B does not show a cost basis amount, you will need to refer to your records from the original acquisition to determine the cost basis. In cases where additional ordinary income associated with the shares is reported on your Form W-2 for the year, you will need to adjust the cost basis on your tax return to reflect the total of the two numbers. This can be accomplished on Form 8949 as part of the Schedule D. Refer to How Do I Complete the Schedule D and Form 8949 for Reporting Stock Sales? for more information. The reporting of restricted stock shares is different than the above. Restricted stock that is granted at $0 is considered non-covered securities. Per Internal Revenue Service reporting rules, sales of non-covered securities do not require the inclusion of a cost basis amount on the Form 1099-B. If the information is readily available, we include a cost basis amount for these types of shares on the Form 1099-B, which is equal to the full value of the shares at acquisition GUIDE TO TAX REPORTING FOR US EQUITY 14

15 b. What if my equity award allows for deferrals? Some equity plans allow for the deferral of receipt of shares from a Restricted Stock Units vesting. This allows you to elect to defer the income recognition and income tax withholding to a point in the future when you expect your tax obligations to have decreased (e.g., retirement). If your plan or grant allows for deferrals, you must follow specific filing and timing requirements to make an election to defer share delivery past the original vest date for all or part of the grant. However, tax withholding at vesting is still required for employment (Social Security and Medicare) taxes on the full value of the vested shares. Discussion of deferral scenarios is outside of the scope of this guide. Consult your company plan administrator and professional tax advisor to understand specific ramifications for your own situation. c. What if my equity award allows for early exercise? Some equity plans allow for unvested options to be exercised. Exercising unvested options is a tax minimization strategy that has both pros and cons. Discussion of early exercise is outside of the scope of this guide. Consult your professional tax advisor for guidance relative to your own situation before deciding whether to make this election and to understand the tax reporting obligations. d. What if my equity award has retirement eligibility provisions? Some equity plans accelerate vesting for stock awards at retirement eligibility age. Once you have achieved retirement eligibility according to the rules of the plan, there is no longer a risk you will forfeit your grants due to job termination at retirement. You will incur recognition of income and required tax withholding for employment (Social Security and Medicare) taxes at the time you meet the retirement eligibility requirements, even though you haven t yet retired and you haven t received the shares. Federal and applicable state income taxes will be due once the shares are received with Restricted Stock Units and at retirement eligibility age for Restricted Stock Awards. Discussion of retirement eligibility provisions is outside of the scope of this guide. Consult your company plan administrator and professional tax advisor to understand specific ramifications for your own situation. e. What if I am a non-us taxpayer/resident? This guide is primarily intended for US taxpayers/residents. If you are located outside of the US but receive equity granted from a US-based company and the underlying stock is traded on a US-based exchange, the information contained in this guide may or may not be relevant to you. Consult your professional tax advisor to understand specific ramifications for your own situation. 12. When and How are Tax Forms Issued? a. When are tax forms issued? The deadlines for issuance of tax forms depend on the type of form. For 2019, these deadlines are as follows: Form Type Target Mailing Date or Online Posting Date for Participants Form 1099-B: Proceeds from Broker and Barter February 15, 2019* Form 1099-DIV: Receipt of Dividends or Distributions Form 3921: Exercise of an Incentive Stock Option under Section 422(b) Form 3922: Transfer of Stock Acquired Through an Employee Stock Purchase Plan under Section 423(c) Form 1042-S: Receipt of Dividends or Distributions for Non-US Residents February 15, 2019* January 31, 2019 January 31, 2019 March 15, GUIDE TO TAX REPORTING FOR US EQUITY 15

16 *When issued as part of a composite Form 1099-B/Form 1099-DIV; otherwise January 31, 2019 If you conduct activity that generates a tax form, the associated form will be posted online to your Shareworks account by the stated deadline. If you have opted to receive forms by mail, they will be sent to you in addition to being posted online; allow 7-10 business days after the date indicated for the respective statement to be delivered. For electronic delivery, statements are posted to participant accounts no later than the date indicated for the respective form and are immediately available for download; you will receive an notification once the form is ready. If you do not receive your forms electronically or by mail within the respective delivery time frame, contact the Participant Services Group at for assistance. b. How do I find my forms in my Shareworks account? To locate your statements online, select the Tax Documents tab in your Shareworks account to view your tax forms once they are ready. Note: This tab will not appear until Solium issues an electronic form to you for the first time. You will also receive an notification letting you know once a new form has been posted. c. How do I elect to receive tax forms in my Shareworks account or by mail? When you activate your account initially, you will be presented with the option to receive all forms electronically as a default, rather than by mail. You may change the preferred delivery method at any time within your Shareworks account. To do so: Log into your Shareworks account at Click the My Profile tab. Click Manage Document Delivery under the Personal Profile section. The following screen will allow you to review the Electronic Delivery of Tax Forms agreement. Select Yes if you would like to request online delivery or No if you would prefer to receive a mailed version. Click Confirm to complete your request. If you wish to change back to your previous selection, follow the same instructions to change your setting again. Note: This election takes effect on a prospective basis and does not affect forms that have already been issued to you prior to making this request. d. What tax forms are not provided by Solium? The only forms that Solium consistently provides for you are Form 1099-B and access to account and transaction statements if the activity was conducted within your Shareworks account. Form W-2 is issued by your company or its designated payroll provider. Forms 3921 and 3922 may be issued by Solium, your company, or a third party designated by your company. If you do not receive either of these forms as expected, contact your company plan administrator for further assistance. Form 8949 and Schedule D are part of your tax return filing and are not provided by or made available through Solium. 13. How Do I Complete the Schedule D and Form 8949 for Reporting Stock Sales? a. Completing the Form 8949 Before completing the Schedule D, you need to fill out the Form 8949 listing the various transactions that occurred during the year that contribute to your capital gains/loss total. You can also use Form 8949 to adjust your cost basis from the amount reported on the Form 1099-B if needed GUIDE TO TAX REPORTING FOR US EQUITY 16

17 The diagram below shows how to report a sale of shares acquired from a non-qualified award type and sold in a cashless (same-day-sale) exercise, resulting in short-term capital gains: 2018 GUIDE TO TAX REPORTING FOR US EQUITY 17

18 The diagram below shows how to report a sale of shares acquired from restricted stock vesting and sold at least 12 months later, resulting in long-term capital gains: Multiple transactions may be included on the Form 8949 in order to reconcile the amounts reported on the Form 1099-B and to help you calculate total capital gain/loss. The totals may then be transferred to the Schedule D. Before using these diagrams, consult your professional tax advisor for assistance. Note: Form 8949 is part of your tax return filing and is not provided by or made available through Solium. These diagrams have been provided by mystockoptions.com, an independent source of stock plan education and tools, and are intended solely for the purpose of illustrating the reporting rules; you are responsible for completing the Form 8949 for your own tax situation GUIDE TO TAX REPORTING FOR US EQUITY 18

19 b. Completing the Schedule D Once you have calculated your total capital gains/loss on Form 8949, you may complete the Schedule D with the information computed on Form Use the column totals from Form 8949 from Form 8949 to complete Schedule D, where you determine your total long- and short-term capital gains and losses. Starting with reporting of your 2018 income: the totals from Schedule D need to be entered onto the new Schedule 1. The totals from Schedule 1 are then entered on Form The diagram below shows how to report short-term gains or losses on a Schedule D: The diagram below shows how to report long-term gains or losses on a Schedule D: Note: Form 8949 is part of your tax return filing and is not provided by or made available through Solium. These diagrams have been provided by mystockoptions.com, an independent source of stock plan education and tools, and are intended solely for the purpose of illustrating the reporting rules; you are responsible for completing the Schedule D for your own tax situation GUIDE TO TAX REPORTING FOR US EQUITY 19