Filing Your Tax Forms After Exercising Your Non-qualified Stock Options

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1 tax s DECEMBER 2014 Filing Your Tax Forms After Exercising Your Non-qualified Stock Options SUMMARY Morgan Stanley has prepared the following information to assist you in understanding the tax consequences involved when exercising a Non-qualified Stock Option through the cashless exercise method. Also included are forms and an explanation of the information needed to assist you in reporting the exercise of Nonqualified Stock Options on your individual income tax return for Please retain all forms sent to you by Morgan Stanley to use when preparing your tax return. Note: This guide is for Non-qualified stock options and does not address Incentive Stock Options. Morgan Stanley and its affiliates do not provide tax or legal advice. You should, therefore, seek tax advice based on your particular circumstances from an independent tax advisor of your choosing. 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 2014 individual income tax return (Form 1040). Assemble the following forms when you are ready to prepare your tax return: Morgan Stanley s Exercise Confirmation Form or Year-End Exercise Summary Statement. W-2, Wage and Tax Statement from your employer. Morgan Stanley s IRS Form 1099-B. IRS Form 8949: Sales and other Dispositions of Capital Assets. IRS Form Schedule D: Capital Gains and Losses.

2 What information do I need to file my tax return? Forms How to Obtain Questions? Stock Option Exercise Confirmation OR Year-End Exercise Summary Statement IRS Form 1099-B Morgan Stanley mails this to your home at the time of your original exercise (duplicates not available). Morgan Stanley mails this to your home by February 15th.* Morgan Stanley sends this to you by February 15th* of the year following that in which the exercise occurs. Call Morgan Stanley s Customer Service Department at the toll-free number provided on the Tax Reporting Statement (Form 1099-B). Call Morgan Stanley s Customer Service Department at the toll-free 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. IRS Form 8949 Visit your local IRS office or call (800) TAX FORM. You may also obtain this form via the Internet at Call your local IRS office or consult your tax advisor. Schedule D (Form 1040) Visit your local IRS office or call (800) TAX FORM. You may also obtain this form via the Internet at Call your local IRS office or consult your tax advisor. * The Energy Improvement and Extension Act of 2008 changed the due date for providing Forms 1099 to recipients to February 15th. REVIEW THE EXAMPLE The following example reflects a salary of $30,000 and the exercise of 100 options of hypothetical ABC Company Stock. The forms described on the following pages provide the amounts needed to calculate your tax liability. The following exhibits show you where you can find the information you need to prepare your individual tax return. 2 MORGAN STANLEY 2014

3 Step 1 Your Gain from Your Sale of Company Stock (Exhibits 1 & 2) Your pretax gain is located on your Morgan Stanley Exercise Confirmation (Exhibit 1, letter a ). You can doublecheck 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. e a e a a s a eme p e mpa for illustrati ur os s only e m a s a le e e se ma same p ess s e e e se s mma s a eme for illustrati ur os s only a 2014 The examples above and left are hypothetical and do not reflect the results of an actual sale or transaction. MORGAN STANLEY

4 Step 2 Capital Gains and/or Losses Calculate your capital gains and/or losses using the appropriate IRS forms. All capital transactions are reported on Form 8949 Sales and Other Dispositions of Capital Assets (Exhibit 3); the subtotals from this form are then carried over to Schedule D (Exhibit 4), where gain or loss is calculated in aggregate. e s m sales a e sp s s ap al asse s for illustrati ur os s only Complete appropriate Short-Term or Long-Term section. Check appropriate Box A, B or C, depending on what is provided within either Box 3 or Box 5 on your 1099-B. Sections b, c, d and e should be populated with the amounts from your 1099-B. Section g should include any compensation income associated with the transaction. The example above is hypothetical and does not reflect the results of an actual sale or transaction. 4 MORGAN STANLEY 2014

5 e s m s e le ap al a s a l sses for illustrati ur os s only Part I corresponds with Part I of Form The totals from Form 8949 are to be carried over to Schedule D. The example above is hypothetical and does not reflect the results of an actual sale or transaction. MORGAN STANLEY

6 The Basics of Exercising 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 prepares and issues you a Form 1099-B (see Exhibit 5) 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. The information in this brochure is intended to simply explain the transactions 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 and your Form W-2 provided by your company. You should contact your tax advisor for information regarding the federal (as well as state and local) tax consequences of your specific transaction. Definitions The fair market 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. THE MORGAN STANLEY ADVANTAGE For nearly 80 years, Morgan Stanley has been a leader, innovator and resource for successful individuals and their families, as well as corporations, foundations and endowments. Our Financial Advisors work from an extensive knowledge base built on diverse skills, experience, training and professional interests. The Global Stock Plan Services unit of Morgan Stanley has over four decades of experience delivering advice and transaction support to stock plan administrators and participants. We are also a market leader in providing financial solutions to meet the specialized needs of executives, including #1 in 10b5-1 plans.* 6 MORGAN STANLEY 2014

7 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 income you earned upon the exercise is reported as taxable compensation (wages) on Form W-2 in Box 1. Q. Does the Form 1099-B show the options that I exercised? A. No. The options you exercised are shown on your Morgan Stanley Exercise Summary or confirmation Statement. The Form 1099-B shows proceeds from the sale of shares you obtained as a result of your option exercise along with the minimum cost basis amount. Q. How can I determine my capital gain or loss on shares sold as part of an exercise? A. Refer to Step 2 of this brochure. Q. What is the cost (tax) basis of shares I obtained through an exercise? A. The term cost basis refers to the original price paid of an asset for tax purposes (usually the purchase/grant price), adjusted for wash sales, stock splits, dividends and return of capital distributions. In the case of exercising a Non-qualified Stock Option through the cashless exercise method, the full e m a s a le m for illustrati ur os s only The example above is hypothetical and does not reflect the results of an actual sale or transaction. or adjusted basis includes the compensation component. Therefore, the adjusted basis is the fair market value of your company s stock at the time of exercise, multiplied by the number of options exercised. The cost basis is used to determine capital gain or loss when an asset is sold or disposed of. In accordance with regulatory requirements, Morgan Stanley will not include the compensation component in the cost basis reporting for the 2014 tax year. We will include adjustments for wash sales, in compliance with the regulatory requirement. The full basis should be included on Form As shown on Exhibit 5, you can find b Cost or other basis and c Wash sale loss amounts on your b Q. Can I file a Form 1040EZ or Form 1040A with a Form 8949 and 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. Form 8949 and Schedule D must be attached to an optionee s Form c MORGAN STANLEY

8 * Source: Washington Service. Morgan Stanley ranked #1 in 10b5-1 market share from 2005 through Data from the period 2/1/2005 to 5/31/2009 reflects the formerly separate PDP businesses of the Global Wealth Management Group of Morgan Stanley & Co. LLC and the Smith Barney division of Citigroup Global Markets Inc. that now form Morgan Stanley Smith Barney LLC. This data also includes transactions from Morgan Stanley & Co. LLC. Information contained herein was obtained from sources believed reliable but the accuracy and completeness thereof cannot be guaranteed. Information contained herein is subject to change. Morgan Stanley Smith Barney LLC ( Morgan Stanley ), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for legal matters Morgan Stanley Smith Barney LLC. Member SIPC. CRC /14 CS /14