How do I make a Long-term gain (> 1 year) to be treated as ordinary income (due to disqualified disposition)?

Forum|Forum|6 years ago
December 7, 2019
1 reply
16 views

I have a client who sold Restricted Stock Units before the holding period of 2 years from the date of grant had passed. The sale is reported to the IRS as Long-term since it was greater than one year. The broker statement says "Your reported sales transactions includ a shale of shares aquired through an equity compensation plan that are "disqualified dispositions" for US federal income tax purposes, which may give rise to ordinary income instead of captial gain or loss."

I completed the Capital Gain/Loss Transaction worksheet (parts I-III) and the Employer Stock Transaction worksheet (parts II & VI) but it still shows up as a Long-term gain. Is there a way to force it to be treated as ordinary income?

ProSeries Basic

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Best answer by itonewbie

You are missing the point. RSU is not a statutory plan, which means there is no preferential tax treatment and there is no such thing as disqualifying disposition of RSU.

Income for RSU should have been fully accounted for on the W-2 and established a cost basis. You need to refer to the grant/award statements (with reference to your client's compensation breakdown) for details of the cost basis and should report the sale as LTCG.

Even if it were a statutory option, which it is not, your understanding is not the correct tax treatment for disqualifying disposition.

itonewbieAnswer

Level 15

You are missing the point. RSU is not a statutory plan, which means there is no preferential tax treatment and there is no such thing as disqualifying disposition of RSU.

Income for RSU should have been fully accounted for on the W-2 and established a cost basis. You need to refer to the grant/award statements (with reference to your client's compensation breakdown) for details of the cost basis and should report the sale as LTCG.

Even if it were a statutory option, which it is not, your understanding is not the correct tax treatment for disqualifying disposition.

---------------------------------------------------------------------------------Still an AllStar

K

korndog1984Author

Level 3

Thank-you for your help. Let me add a few more details. The compensation was included in the taxpayer's 2017 W-2, which is the basis and Fidelity agrees with the number. It was Fidelity's comment about the disqualifying disposition that lead me down this trail of wondering if the gain is to be treated as LTCG or ordinary income. Thank-you for letting me know that the proper treatment is LTCG.

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