What Are a Company's Tax Reporting Obligations for Incentive Stock Option Exercises?

Every corporation, whether a startup or public company, that has an employee who exercises an incentive stock option (ISO) must provide the employee an information statement about the exercised option (using IRS Form 3921). A copy of Form 3921 must be provided to the employee no later than January 31 following the calendar year of exercise, and a copy of the information statement must be filed with the IRS by February 28 (or electronically by March 31) following the calendar year of exercise.

This means that for each employee who exercised ISOs in 2020, the company must furnish a copy of Form 3921 to the employee by February 1, 2021, (because January 31, 2021 falls on a Sunday) and file a copy of Form 3921 with the IRS by March 1, 2021, (because February 28, 2021 falls on a Sunday) if filing a paper return, or March 31, 2021, if the form is filed electronically.

The information to be provided on Form 3921 includes:

• The date the option was granted;
• The date the option was exercised;
• The exercise price per share;
• The fair market value per share on the date of exercise; and
• The number of shares transferred pursuant to exercise of option.

Are there exceptions? Of course!

• The Form 3921 information reporting requirement only applies to the exercise of an incentive stock option. It does not apply to the exercise of a nonqualified stock option.
• A Form 3921 is not required for the exercise of an ISO by someone who is a nonresident alien and to whom the company is not required to provide a Form W-2.

A corporation is subject to a penalty if the Form 3921 is not timely provided to the employee or filed with the IRS. The penalty ranges from $50-$280 per form, depending on how late the form is.

You can find a downloadable version of Form 3921 here.