Corporations often offer incentive stock options to some set of employees as a bonus or reward for work. As we described in our discussion of Form 3921, these incentive stock options (ISOs) are valuable because they allow employees to purchase company stock at a discount, as long as certain tenure conditions are met. Once an employee exercises an ISO, she might want to sell the stock or transfer the shares out of the company and into her brokerage account. When this occurs, the corporation must file Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c).
Requirement to File
The corporation issuing the ISOs must report on Form 3922 the transfer of the stock resulting from the option exercise if certain conditions are met:
- Section 423(c) of the tax regulations governs the ISOs.
- The employee sells/gifts the shares or transfers them to an account outside the company.
- The exercise price of the ISO is less than 100 percent of the stock’s value on the grant date, or the price is indeterminate on that date.
- The shares must have serial numbers, and physical certificates must have a unique color.
- The employee has filed a W-2 Form and is not a nonresident alien.
- The issuer of the stock is the stock’s corporation, a related corporation, an agent of the corporation, a third party such as a brokerage firm that is distributing the stock and any party who controls the payments to employees of the corporation.
The corporation must issue a copy of Form 3922 to the employee by January 31 and to the IRS by February 28 if filing paper copies or March 31 for electronic filings. Note that no tax is due from the transfer to an outside broker if the employee remains the beneficial owner. If sold, the employee must report the sale as a gain or loss.
Filling Out the Form
Enter the following information onto Form 3922:
- Corporation identification
- Employee identification
- Account number
- Date the option was granted
- Date the option was exercised
- Fair market value of shares on grant date and on exercise date
- Exercise price
- Number of shares transferred
- Date that legal title was transferred
- The exercise price as if the options were exercised on the grant date
Filing Form 3922
A large company that grants many ISOs to many employees faces the huge task of issuing copies of Form 3922 for all option-related stock transfers. The company can choose to completely outsource the job or to purchase Form 3922 software to ease the task. Although an employer could file using paper forms, electronic filing is required when the number of forms exceeds 250.
Failing to file is not an option, because the IRS extracts penalties for missing, late or incorrect filings. Penalties begin at $30 per form, escalate to $100, and the aggregate fine can reach as high as $1.5 million a year.
