Defining an ISO
An incentive stock option is an option granted to an individual by the corporation they work for and applies to that corporation’s stock only.[1][2] The option must be approved by the majority of the voters at a stockholders’ meeting or by state law.[3]
Who Uses a 3921?
When an employee exercises an incentive stock option, the corporation that granted the option must file Form 3921. According to federal law, a corporation is either the company that issued the stock, a related company, an agent of the company, a related entity such as a brokerage firm, or a party controlling the remuneration of employees.[4]
Form 3921 does not need to be filed for nonresident alien employees.[5]
Deadlines
A copy of Form 3921 must be sent to the employee named on the form by January 31 of the year after the ISO was exercised. Copy A must be filed by February 28, or by March 31 if filed electronically.
ISO vs. NSO
The primary difference between an incentive stock option, or an ISO, and a non-qualified stock option, or an NSO, concerns tax liability. An ISO generally doesn’t get taxed as regular income but at a lower capital gains rate. An NSO, on the other hand, gets taxed as income.
Another difference centers on who qualifies. An ISO can only be granted to a valued employee by a corporation, whereas NSOs can be offered to any individual who works with a corporation, such as a contractor.
What is the Holding Period Requirement?
The IRS requires employees to hold stocks purchased under an ISO for a period before selling them to qualify for special tax treatment. The holding period begins on the day after the option is exercised, and lasts for two years from the date the option is granted and one year from the date of exercise. The ability to exercise an ISO expires after 10 years.[6]
3921 Form Parts (11)
Transferor’s Information
Enter the name, address, city, state, country, and ZIP or postal code for the transferor, which can be either the employer transferring the stock or a transfer agent.
Transferor’s TIN
Employee’s Information
Employee’s TIN
Box 1: Date Granted
Enter the date the ISO was granted.
Box 2: Date Exercised
Enter the date the ISO was exercised.
Box 3: Price per Share
Enter the exercise price per share of stock.
Box 4: Fair Market Value
Enter the fair market value (FMV) per share of stock on the date the option was exercised.
Box 5: Number of Shares
Enter the number of shares of stock transferred under the exercise of the option.
Box 6: Corporation
Enter the name, address, and TIN of the corporation whose stock is being transferred under the exercise of the option. Enter this information only if the corporation is not the transferor. Leave this blank otherwise.
Account Number
The account number is optional but required if the filer is filing more than one Form 3921 for a particular employee.
Instructions for Filers (6 Steps)
1. Obtain Employee’s TIN
2. Obtain Form
Those filing by mail are required to order physical copies of Form 3921 from the IRS. If you are using the downloadable version of Form 3921, do not file Copy A, which is the red copy.
3. Complete Form
4. File Copy A with IRS
5. Send Copy B to Employee
Send Copy B to the employee who exercised the ISO during the tax year.
6. Retain a Copy for Records
The IRS recommends retaining records for three years.[7] Copy C is for the company whose stock was transferred. Copy D is for the transferor. Often the company and the transferor are the same, so Copy D isn’t necessary.
Frequently Asked Questions (FAQs)
What do I do if I receive Form 3921?
You received Form 3921 because you exercised an ISO in the prior tax year. The resulting gain or loss, which is cataloged on the Form 3921 you received, must be reported on Schedule D (Form 1040) of your income tax return.
What if my company doesn’t file Form 3921 on time?
There are penalties for not filing Form 3921 on time. Fines increase after 30 days and then again after August 1. Maximum penalties are steep — for a business that files after August 1, the maximum penalty is upward of $3 million per year — so it’s best to file these on time.[8]
What is the difference between Form 3921 and Form 3922?
These forms are easily and often confused. Form 3921 reports the exercise of an incentive stock option, whereas Form 3922 reports the transfer of stock made to an employee under an employee stock purchase plan.