Equity Forms › What is Form 3921? Incentive Stock Option Exercise Reporting
Form 3921 (Exercise of an Incentive Stock Option Under Section 422(b)) is used to report the exercise of Incentive Stock Options (ISOs). Corporations that transfer stock to employees pursuant to an ISO must file this form for each exercise during the tax year.
The information on Form 3921 helps employees determine the tax treatment of their stock options and calculate any potential Alternative Minimum Tax (AMT) liability.
Form 3921 must be filed by corporations that:
The form must be filed for each ISO exercise, regardless of whether the employee holds or sells the stock after exercise.
| Box | Description |
|---|---|
| 1 | Date option was granted |
| 2 | Date option was exercised |
| 3 | Exercise price per share |
| 4 | Fair market value per share on exercise date |
| 5 | Number of shares transferred |
ISOs are a type of employee stock option that can qualify for favorable tax treatment if certain requirements are met:
When properly exercised and held, ISOs can receive favorable tax treatment:
Important: If holding period requirements are not met (disqualifying disposition), the spread at exercise becomes ordinary income.
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For details, see our Form 3921 due date guide.
ISO option granted to employee
Employee exercises option (Form 3921 filed)
Holding period #1
Qualifying disposition = LTCG
Incentive Stock Options (ISOs) can receive favorable tax treatment if holding requirements are met - no ordinary income at exercise and long-term capital gains on sale. Non-qualified stock options (NQSOs) are taxed as ordinary income at exercise on the spread between exercise price and FMV. Only ISO exercises require Form 3921; NQSOs are reported on Form W-2.
The Alternative Minimum Tax (AMT) is a parallel tax system with fewer deductions. When you exercise an ISO, the "spread" (FMV minus exercise price) is an AMT preference item. This means you may owe AMT in the year of exercise even though you don't owe regular income tax. Form 3921 provides the data needed for AMT calculations on Form 6251.
A disqualifying disposition occurs when you sell ISO stock before meeting both holding requirements (2 years from grant AND 1 year from exercise). When this happens, the spread at exercise becomes ordinary income (reported on W-2), and you lose the favorable capital gains treatment. The employer must report this as compensation.
Yes, Form 3921 must be filed for every ISO exercise, regardless of whether the employee holds or immediately sells the stock. A same-day sale is a disqualifying disposition, but the exercise still requires Form 3921. The employer will also need to report the ordinary income on the employee's W-2.
For publicly traded stock, the FMV is typically the closing price on the exercise date, or an average of high and low prices. For private company stock, FMV must be determined by a 409A valuation - a formal appraisal conducted by independent experts, usually within 12 months of the exercise date.
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BoomTax and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors prior to engaging in any transaction.