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Do monies from stock sales count in the calculation of earned income?

Accounting For Stock Sales


Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |


When you sell stock and the amount you sell it for is greater than the amount paid, it will end up in income of some sort. What sort of gain it is (and therefore what type of income) depends on where the stock came from (options, gift, purchase), how long it was held (a year is the general trigger), if option based was an 83b election made, if from options were they ISOs or NQs? All this will determine if it income or capital gains (different tax rates). I advise you have an accountant go over the specifics, as careful planning makes a world of difference.



Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

Hi Johanna,

In addition to the great answers on this page, take a look at some of these other employee stock sale discussions here on Proformative.

Jim Schwartz
Title: Corporate financial advisor
Company: Wabash Financial Strategies
(Corporate financial advisor, Wabash Financial Strategies) |

The simple answer to your question is "No." I don't know all the nuances related to options situations referenced in Keith's reply but let's put that category aside. Discuss that case with a personal tax advisor if necessary.

Generally, if you purchase stock or receive it through a gift or inheritance, selling the stock creates a capital gain or loss. The way you obtained the stock (think inheritance) and the length of time you held it before selling determine whether the event is short- or long-term for tax purposes. Such sales are not earned income unless you earn your living as a professional who buys and sells stocks. Earned income is typically wages, salaries, tips or earnings from self-employment - things that result from your labor and are usually reflected on a W-2 or, perhaps, on a 1099-MISC if you're working on a contract basis. Interest, dividends and unemployment compensation are, for example, not earned income.

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

From your professional title, I'm guessing your question may relate to equity issued to employees under your company's ESOP. If I'm wrong, stop reading. :7)

1. If the stock sale is actually the result of a cashless exercise of options (i.e. exercise and immediately sell the stock), the difference between the exercise price and the FMV of the stock is treated as earned income. Your company must withhold taxes and report the earnings on the employee's W-2.

2. If an employee exercises options but holds on to some or all of the shares, they must pay tax as in 1. However, when they sell the shares at some future date, any gain would now be considered capital gain, not earned income.

3. If an employee is granted stock (rather than options), the FMV of those shares must be treated as earned income (as in 1), subject to vesting provisions. When they sell the shares, any gain would be treated as a capital gain, not earned income.


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