If they bought and sold their NQSOs in a “cashless” sale, the transaction needs to be reported on their tax return even though there are usually no taxes due from the event.
Even though your client hasn’t seen any money, they may have a tax liability if they exercised and held Incentive Stock Options. This is “phantom” income..When they exercise and hold ISOs, the fair market value of the stock less the exercise price is considered income by the IRS.
For those who make the 83(b) election for their Restricted Stock Awards (RSAs), the fair market value of the stock at grant minus any amount paid for the grant is reportable as compensation in the year of grant. It’s worth mentioning one more time that the 83(b) election is available only for Restricted Stock Awards (RSA) and not Restricted Stock Units (RSUs). The difference between these two is that the RSU is a grant of actual stock with restricted rights, while the RSU is a grant based on the value of stock but there is not stock issued at the time of grant.
Dave E. Du Val, an enrolled agent, is vice president of customer advocacy for TaxAudit.com.