Larry Israel wrote:

- quote -

I'm going to assume your son is a US citizen and that he is
working temporarily out of country (you said he was working
for a year). This means he has not changed his tax home
from the U.S. and is therefore not eligible for the foreign
earned income exclusion. I bring this up because the
difference between what he paid for the stock and the FMV on
the date of exercise is considered to be earned income and
would be part of the formula for excluding earned income.

So, given my assumptions, he has a $3 gain per share (paid
$2 less than market plus the short term gain of $1 when he
sold). He puts $2 per share on Line 7 of his 1040 as that is
considered earned income. He adds that $2 to what he
actually paid to get his cost basis. Schedule D will reflect
$1 per share short-term capital gain.

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My son is a foreign resident, working for a subsidiary of an
American Company. He is working for a year. He bought
stock under anon-qualified stock purchase plan that gives
options that vest in half a year. He exercised the option
when the market price was $2 a share more than his price
under the option. Then he kept the stock for three months
and sold it at a price $3 more than at which he bought it.

I understand that all $5 should be counted as 2006 regular
income. Is that right? Also the American stockbroker will
be reporting the sale to IRS. Therefore he will have to
complete a Schedule D. What is the purchase price that he
should put on for that stock so that he need pay no capital
gains tax on it, as he should count the profit as ordinary
income. His foreign employer does not provide an American
W-2.

<< ================================================== ===== > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >