How To Report Stock Options, Wash Sales, and Cash in Lieu on Form 8949

If you read our blogs on a regular basis, you’ll know that we’ve authored several articles about Form 8949. The IRS’s website states that the form’s official purpose is to “reconcile amounts that were reported to you and the IRS on Form 1099-B or 1099-S.” With that in mind, we’ve written about Form 8949 in reference to capital gains tax reporting, as well as inherited property tax and opportunity zone deferrals. 

The beauty of Form 8949 is that it’s an all-purpose tool. In addition to helping you report the above-mentioned actions and items, it’s also used to report stock options, wash sales, and cash in lieu. There is a reason why this form is the recipient of “Sales and Other Dispositions of Capital Assets.” 

Stock Options

Corporate stock allows you, an investor, to purchase “pieces” of a particular company. Stock options, on the other hand, are a contract between you and the company, giving you the right to buy or sell corporate stock on a specific date or at a specific price.

Because options are a form of an equity derivative, this form of investment isn’t for the faint of heart. And, when you sell those options or they expire, they need to be reported on Form 8949. Further complicating the process is that, unlike regular stocks, your brokerage form won’t send a Form 1099 describing the trade. You’ll need to use your statements to match each option trade.

To report this:

• Enter the name of the company, write “options” and the number sold on Line 1, Column A
• Enter the date of purchase in Column C
• Enter the expiration date or sale date in Column D
• Enter the sales amount in Column E; if the option expired, write “expired”
• Enter the amount you paid for the option in Column F

In most cases, stock options expire in less than a year, meaning they would be reported as short-term capital gains or losses—and taxed as ordinary income, rather than at the capital gains tax rate.

Wash Sale

A wash sale could be considered similar to real estate flipping, but with stocks or securities. The process consists of:

• Selling or disposing of a stock or security at a loss, then within 30 days:
• Buys identical stock or securities, or
• Buys substantially identical stock or securities in a fully taxable trade, or
• Enters into a contract to buy substantially identical stock or securities, or
• Acquires substantially identical stock or securities for an IRA

Investors might use a wash sale to ramp up artificial losses. But the IRS is not a fan of this, which is why its wash-sale rule disallows taxpayers from claiming such losses on their federal tax returns. 

But you need to report that wash sale on Form 8949 by:

• Entering a description of the stock or security and how many shares were purchased on Line 1, Column A
• Entering a “W” in Column F to specify a wash sale
• Entering the nondeductible part of the wash sale in Column G

Keep in mind that a wash sale, by its very nature, is considered a short term hold of a capital asset, and is reported on the first page of Form 8949. 

Cash in Lieu

Cash in lieu is when a corporation issues cash in lieu of fractional stock shares. This commonly occurs with corporate stock splits. In such a situation, you might not own enough stock to receive full shares following the split. So the corporation might sell those fractional shares for cash, and send the proceeds to you.

Regardless of the reason for cash in lieu, the IRS definitely considers this as cash from the sale of stock, which also needs to be reported on Form 8949.

To do this:

• Enter a description of the stock on Line 1, Column A
• Fill in the date of acquisition in Column B and the date of sale in Column C
• If appropriate, add in other costs or basis in Column E

Unlike the wash sale or stock option, it’s possible that any cash in lieu gain is a long-term gain, based on how long you held the stock before its split or sale.

Form 8949 and its Proper Use

The purpose of Form 8949 is to help you reconcile the sale of all capital assets and properly report them on a Schedule D. As such, the information entered into Form 8949 should be accurate, to prevent problems down the road. To ensure accuracy, be sure to talk with your tax professional.