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Tax Filing Basics for Stock Plan Transactions

Morgan Stanley recognizes that tax reporting for stock plan transactions can be confusing. Understanding the Internal Revenue Service (IRS) regulations along with knowing what IRS Forms must be filed can be overwhelming.

The basic concept. If you sell stock as a result of participation in your company’s stock plan, you may need to:

• Refer to the cost basis provided by Morgan Stanley,

• Make any adjustments to it, if necessary, and• Determine whether you have realized a capital

gain or loss.

To simplify the process, we’ve gathered the basic information you may need to lay the foundation for a stress-free tax season.

TABLE OF CONTENTS

2 Tax Documents You Will Need

3 How to Calculate Your Cost Basis

5 Steps to Report Your Transaction

8 Have Questions?

8 Terms You Should Know

Important Note: This guide is not intended to be comprehensive tax advice or replace the advice of a tax advisor. We recommend you seek the counsel of a certified tax professional to obtain personalized and comprehensive guidance.

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TAX FILING BASICS FOR STOCK PLAN TRANSACTIONS

MORGAN STANLEY | 2016

Additional documents will be sent to you by Morgan Stanley depending on the type of stock plan transaction.

Stock Options ExerciseCashless Exercise (Exercise and Sell)(Sell-to-Cover)

Exercise Confirmation and Year-End Stock Plan Summary

Restricted Stock/UnitsSell-to-Cover or Sell-All-Shares

You will receive a …




Release Confirmation and Year-End Stock Plan Summary

Employee Stock Purchase Plan (ESPP)Sell Share(s) From ESPP

Confirmation and Quarterly Account Statement

Restricted Stock Long SharesSell Long Shares From Your Account

Confirmation and Quarterly Account Statement

Confirmations are received at the time of the transaction.

Note: If you’ve received a distribution of funds from a Restricted Cash Plan Vesting, the income and taxes will be reported on your W-2 from your company. Morgan Stanley does not report on this type of transaction. Please contact your company with any questions.1 If you are not an employee but received compensation, the company will send a 1099-MISC instead of a Form W-2.2 Keep in mind, not all transactions generate a 1099-B.

Tax Documents You Will NeedYou may need various documents and forms to report your stock plan transactions on your tax return. The table below lists the tax forms, what they’re used for and how to obtain them.

FORMS WHAT IS THE FORM FOR? HOW DO I OBTAIN IT?

Company Form Form W-21 Form W-2 is the Wage and Tax Statement from your employer.

Your company will send this to you.

IRS Forms IRS Form 8949 IRS Form 8949 is used to report sales and other dispositions of capital assets to the IRS.

Visit your local IRS office or call 800-TAXFORM.

Go to www.irs.gov.

Schedule D (Form 1040)

Schedule D (Form 1040) is used to report your Capital Gains and Losses to the IRS.

Morgan Stanley Forms

Form 1099-B2 Morgan Stanley’s IRS Form 1099-B reports any sale transactions completed during the year and backup withholding applied to the transaction (if any).

You may receive more than one Form 1099-B from Morgan Stanley.

Morgan Stanley sends this to you by February 15 of the year following your transaction.

Go to www.stockplanconnect.com. From the home page, select: Documents > Tax Documents, or Tax Resources > Documents

Form 1099-DIV Form 1099-DIV shows any reported dividend payment received throughout the year.

Form 480.6A (Puerto Rico residents only)

Form 480.6A reports dividend income and/or gross proceeds less commissions and fees. The numbers reported on the 480.6A are the same amounts that the firm reports to the IRS on Forms 1099-DIV and 1099-B.

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How to Calculate Your Cost Basis Any gain or loss you realize from the sale of shares from an equity compensation plan will need to be reported on your Federal Income Tax Return. To determine if you had a gain or a loss, you will need to know the cost basis of the shares, which will be provided to you by Morgan Stanley. When available, Morgan Stanley can provide the original purchase price to assist in making this calculation. In addition, you may need to adjust the cost basis to reflect any compensation income reported by your employer.

It is important to understand how to calculate and report cost basis when filing your taxes. Morgan Stanley will report the cost basis to the IRS for transactions considered “covered” under IRS cost basis reporting regulations. Whether a transaction is “covered” or “noncovered” is determined by the type of security and the year acquired. You will see this identified on Morgan Stanley’s Form 1099-B. It is possible to have both covered and noncovered transactions in the same security.

Regardless of the covered or noncovered status of a transaction, an adjustment to the basis may need to be reported on IRS Form 8949 and Schedule D of Form 1040. Refer to the instructions on the next page for assistance in calculating cost basis.3

3 Your cost basis in your shares may differ depending on your particular facts and circumstances, including whether a section 83(b) election was made or the timing of vesting. Please consult your tax advisor to determine the accurate cost basis in your particular circumstances.

Don’t Forget Wash Sales Wash sales need to be reported on IRS Form 8949 and Schedule D. A wash sale occurs when shares of a security are sold at a loss, and “substantially identical” shares are purchased within 30 days before or after the sale. The loss is disallowed and must be added to the cost basis of the newly purchased shares.

Morgan Stanley will report wash sales only for transactions occurring within a single Morgan Stanley account. Since a wash sale can be triggered by activity within multiple accounts, either at Morgan Stanley or at another brokerage firm, it is critical that you review all transactions in company stock. Seeking advice from a tax advisor is recommended.

What is Cost Basis? Cost basis refers to the cost of shares used to calculate gains or losses for tax purposes.

What does Covered vs. NoNCovered MeaN? Covered means the transaction’s cost basis must be reported to the IRS by Morgan Stanley. If noncovered, Morgan Stanley is not required to report the cost basis.

You Will reCeive Multiple 1099s if:

• You sell long shares acquired through your equity plan and complete a stock plan transaction.

• You sell long shares within more than one Morgan Stanley brokerage account.

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Column AGrant/Award Type and Transaction Taking Place in Your Stock Plan Account

Column BCost Basis Shown on Form 1099-B

Column CHow to Adjust Cost Basis for Form 8949 and Schedule D

Restricted Stock or Units

Sell-to-Cover (STC)/ Sell-All-Shares (SAS) at the time the shares vest

Fair Market Value (FMV) at Vest: (Number of shares sold x FMV)

Not Applicable

Sell long shares post-vest FMV at Vest: (Number of shares sold x FMV)

Not Applicable

Incentive Stock Options (Cashless Exercise / STC)

Qualifying Disposition Grant Price: (Number of shares sold x Grant Price)

Not Applicable

Disqualifying Disposition Grant Price: (Number of shares sold x Grant Price)

Lesser of:1. The spread between the grant price and the FMV on

exercise date or2. The actual gain (amount realized on the sale less the

aggregate grant price.)

Nonqualified Stock Options (Cashless / STC)

Cashless Exercise4 Grant Price: (Number of shares sold x Grant Price)

Calculate the difference between the Sale Price and the Grant Price multiplied by the number of shares sold.

STC Grant Price: (Number of shares sold x Grant Price)

Calculate the difference between the FMV Price at exercise and the Grant Price multiplied by the number of shares sold.

Employee Stock Purchase Plan

Qualifying Disposition (§ 423 Plan) Purchase Price: (Number of shares sold x Purchase Price)

Lesser of:1. The amount of the discount based on the grant date

FMV multiplied by the number of shares acquired.2. The sales price per share minus the actual price paid

per share times the number of shares (or total gain).

Disqualifying Disposition (§ 423 Plan) or non-§ 423 Plan with a discount

Purchase Price: (Number of shares sold x Purchase Price)

The spread between the purchase price and the FMV of the stock on the purchase date.

Nondiscounted Plan Purchase Price: (Number of shares sold x Purchase Price)

Not Applicable

Stock Settled SARs

STC Net Exercise and Remaining Shares Sold

FMV: (Number of shares sold x FMV) Not Applicable

4 If your company is enabled for 1099-Relief, you will not receive a 1099-B for your cashless exercise(s) as your company will report this information on your W-2.

1 4Find your Grant/Award type and transaction type in Column A.

2Refer to Column B to see the cost basis reported on Form 1099-B.

3Determine if an adjustment is necessary in Column C and how it is calculated.

Consider if a “wash sale” applies to you.

Instructions for Calculating Cost Basis

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Steps to Report Your Stock Plan Transaction Once you understand cost basis, you are ready to work on your tax return. There are five main steps to the process. To illustrate these steps, we’ll walk through an example of a Restricted Stock Award release with a Sell-All-Shares transaction.

Step 1Start by referring to the tax document Morgan Stanley sent to you. This will show you the transaction amount subject to taxation and the amount applicable for withholding.

In our example, you would refer to your Release Confirmation (Exhibit 1– a and b) to find these numbers:

a $28,089.41 – taxable compensation

b $10,303.20 – tax withholding

EXHIBIT 1

For illustrative purposes only.

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EXHIBIT 2

EXHIBIT 3


Step 2Compare the taxable amount to your Form W-2 that reflects your wages, tips and other compensation amount. For our example, see box 14 (Exhibit 2 – a). Keep in mind, compensation could be reflected in multiple boxes on your W-2.

The company is required to supply employees (or former employees) with a Form W-2 to report the compensation income recognized as “wages” by the IRS. In the case of a non-employee, the compensation income will be reported on a Form 1099-MISC.

TIP: Companies may display W-2 compensation in multiple boxes, depending on the type of award/transaction.

a

Step 3Refer to Form 1099-B (Exhibit 3 – a and b) sent by Morgan Stanley to find the gross proceeds (less commissions) and cost basis. The cost basis will be reported to the IRS for transactions identified as “covered.” For noncovered transactions, only the gross proceeds less commissions will be reported to the IRS.

a Box 1d reflects the gross proceeds less commissions. The actual net proceeds you receive will differ according to whether federal and income tax and federal backup withholding applies. For example, for Stock Option cashless exercises, you will notice that the amount in Box 1d may be significantly larger than the actual proceeds you received.

b Box 4 only reflects the amount of federal backup withholding, if applicable. It does not show federal income tax.

REMINDER: Backup withholding occurs if you don’t have a W-9 or W-8BEN Tax Certification form on file with Morgan Stanley. It’s quick and easy to certify online at www.stockplanconnect.com to prevent any backup withholding.

a b


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Step 4 Calculate your gains and/or losses using Form 8949 — Sales and Other Dispositions of Capital Assets. (See Exhibit 4– a.) This is where you enter your cost basis and any applicable adjustments. Refer back to page 4 for information on cost basis.

Step 5Carry over the subtotals resulting on Form 8949 to Schedule D Form 1040. (See Exhibit 5– a.)

Important Note: The information in this guide is not intended to replace the advice of a tax professional. We recommend you seek advice and guidance from a certified tax professional that can assist you according to your individual circumstances.

EXHIBIT 4


EXHIBIT 5


a

© 2016 Morgan Stanley Smith Barney LLC. Member SIPC. CRC1630970 11/16 CS 8725900 11/16

Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for legal matters.


Have Questions?If you have questions on:

FORM W-2 Contact your company’s payroll department.

IRS TAX FORMS Visit your local IRS office, call 800-TAXFORM, or go to www.irs.gov.

MORGAN STANLEY DOCUMENTS For copies of your documents:

• Go to StockPlan Connect at www.stockplanconnect.com

From the home page, select:– Documents > Tax Documents or– Tax Resources > Documents

• Call Morgan Stanley’s Tax Reporting Service Center at: – 877-772-1099 (toll-free) or – 801-617-7467 (toll)

Terms You Should KnowCAPITAL GAIN OR LOSS. This refers to the profit or loss resulting from the sale of a capital asset, such as stock. • Long-Term Capital Gain or Loss. Long-term capital gain/loss occurs when stock is

held for more than 12 months before selling and is therefore taxed at the favorable capital gain rate.

• Short-Term Capital Gain or Loss. Short-term capital gain/loss occurs on stock held for 12 months or less before selling and therefore is taxed at your ordinary income tax rate.

COST BASIS. The cost basis refers to the cost of shares used to calculate your gains or losses for tax purposes. • Adjusted Cost Basis. The cost of shares for tax purposes (usually the purchase

or acquisition price), adjusted for wash sales, stock splits, dividends, taxable compensation and return of capital distributions.

• Covered Transaction. Covered means the cost basis for 1099-B reportable transactions must be reported to the IRS by Morgan Stanley.

• Noncovered Transaction. Noncovered means the cost basis for 1099-B reportable transactions is not reported to the IRS by Morgan Stanley.

DISPOSITION. This term is another word for a sale or transfer of stock. • Disqualifying Disposition. If the required holding period of two years from

offering/grant and one year from purchase is not met on shares sold from a Section 423 ESPP or the exercise of an ISO grant, the sale is considered a disqualifying disposition and therefore results in certain tax consequences.

• Qualifying Disposition. If the holding period requirement is met before selling the shares, the sale price will determine whether both ordinary income and capital gains apply.