# How to file NSO stock option gains



## Rubberducky (Nov 5, 2019)

I am a US citizen who has never lived inside the US. I was born in Belgium and lived there all my life.

This year I became aware of my obligations to declare taxes in the US. Because of this, I went through the IRS Streamlined Filing Compliance Procedure. I filed the last 3 years of 1040s and 6 years of FBARS. It seems like everything went through correctly and was accepted.

However, at the very end of 2018 I converted part of the NSO stock options from the company I work for into actual stocks. A small part I cashed out. For this I had to fill in the W9 IRS form for my employer. I did not mention any of this (existence of the stocks, nor the W9 form) when filing my taxes.

I found out I will need to amend my 2018 return with this new information. When looking up the rules on NSO stock options, it seems like if had had lived in the US, my employer would have filed a W2 form, and the gains I had from the options will be added to my pay.

Can I just file the W2 form myself and add the gains to my pay? The amount of money I earned in 2018 is still well under the foreign earned income exclusion level. Is it correct I do not have to pay any extra US taxes on this in my case?


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## Rubberducky (Nov 5, 2019)

Edit / short version:
Do the gains on NSO stock options qualify for the foreign income exclusion?
Can I file the W2 form myself in my amendment?


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## Nononymous (Jul 12, 2011)

Consider extricating yourself from this mess by no longer filing.

In general, Accidental Americans such as yourself should not enter the US tax system unless they are planning on moving to the US in the near future. Since you were born in Belgium, you'd have an even easier time of it concealing your US citizenship from both banks and employers - often it's the US birthplace that gives people away.

A certain amount of damage has been done, unfortunately, but you aren't too far in, there's still time to stop. Eventually this will start costing you money and grief.

On a more practical note, the W9 you signed may only exist for the employer to keep on file, and may not be sent to the IRS. In which case you can continue to not report the sale of the stock options. That would be simpler and possibly cheaper than amending past returns.


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## Rubberducky (Nov 5, 2019)

Thanks for the answer. Currently my bank is already aware that I'm a US citizen.
It seems that as long as I earn under $100k per year and not make more than $40k in 'unearned income', I should be exempt from actually paying any taxes. Is that not correct?

Do you also know whether it's true that the stock option gains are just added to my 'foreign earned income'?


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## Bevdeforges (Nov 16, 2007)

Rubberducky said:


> Edit / short version:
> Do the gains on NSO stock options qualify for the foreign income exclusion?
> Can I file the W2 form myself in my amendment?


You can't file a W2 - that's up to your employer. But is your employer a US company? Or, if they are a foreign branch of a US company, you would just add the amount of gain on exercise to what you reported as your salary. (Kind of like you do to report your salary now - if you don't get a W2).


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## Nononymous (Jul 12, 2011)

Rubberducky said:


> Thanks for the answer. Currently my bank is already aware that I'm a US citizen.
> It seems that as long as I earn under $100k per year and not make more than $40k in 'unearned income', I should be exempt from actually paying any taxes. Is that not correct?
> 
> Do you also know whether it's true that the stock option gains are just added to my 'foreign earned income'?


Why did you start filing in the first place? Because it's "the law" or is US person status a potential issue for your employer, if you had signing authority on accounts? 

In general it's not necessary or advisable for someone in your situation to enter the US tax system unless they are planning to move to the US. The IRS has no legal ability to enforce penalties or collect debts from anyone who is a citizen of their home country, as you are.

It may seem easy at this point - income under the FEIE, no tax owing - and it could stay that way for a long time, but lots of people get bitten in the ass as their financial affairs grow more complicated. Want to invest in a mutual fund as part of a tax-protected retirement scheme like the rest of your countrypeople? Prepare to file complicated (and expensive if you use a tax advisor) 3520 forms, and don't be surprised if you suddenly find yourself on the receiving end of a $10k fine for filing incorrectly (see here - it's an epidemic). Sold your house after 30 years and made a gain over $250k? Prepare to pay capital gains, even if it's not taxable where you live (see Boris Johnson). There are many more examples.

It's best not to file. If I were you I'd stop, and find another bank and open accounts without disclosing US citizenship (you're a Belgian born in Belgium, that's all). If you feel very law-abiding and don't plan on ever living there, renounce the US citizenship. $2350 is expensive but it will probably save you money in the long run. Continued filing for no reason is not a smart plan of action.

No idea about the stock options because, obviously, I have no idea how one files US taxes! But be aware that the W9 you signed for your employer does not typically go to the IRS, it's kept on file in case of audit. Which is probably not likely to happen.


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## Rubberducky (Nov 5, 2019)

Nononymous said:


> Why did you start filing in the first place? Because it's "the law" or is US person status a potential issue for your employer, if you had signing authority on accounts?


Because I wanted to be able to freely visit the US without having any outstanding legal issues.


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## Nononymous (Jul 12, 2011)

Rubberducky said:


> Because I wanted to be able to freely visit the US without having any outstanding legal issues.


Sadly you didn't need tax compliance for that. 

If you didn't mind an ESTA waiver you could travel on a Belgian passport. With no US birthplace there would have been no questions. If anything, entering the US tax system increases the odds of future problems, if you get stuck with a crazy bill (like the 3520 issue people are having) or one day realize that you'll need to renounce. 

For the benefit of others, having a US passport is no reason for tax filing. You can apply without obtaining a Social Insurance Number if you didn't have one, and in any case there's no evidence that the IRS has the ability to take passport application data and attempt to follow up to see who is in the tax system. There are plenty of legitimate reasons for not filing - students who earn below the threshold, stay-at-home parents who do not work at all, for example - so non-compliance is not itself evidence of tax evasion. Finally, upon entry to the US, customs and immigration do not make any attempt to check tax compliance status. They do not have direct access to IRS data and it wouldn't tell them anything useful anyway.

There are some travel worries for people who *are* compliant, however. If a tax debt exceeds $51k, it's possible to lose your US passport. As for actual detention on arrival, that would only happen if you and the IRS were very well known to one another - if criminal charges had been filed* or you owed a very large sum of money. (*Simple failure to file is not a criminal matter.) 

Again, for the benefit of anyone in a similar situation who reads this, being worried about travel to the US is *not* a good reason to enter the US tax system.


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## Rubberducky (Nov 5, 2019)

Thanks for all of the information! Do you have any idea how much I 'screwed up' by filing in this case?


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## Nononymous (Jul 12, 2011)

Rubberducky said:


> Thanks for all of the information! Do you have any idea how much I 'screwed up' by filing in this case?


As for how much this mistake could cost you, there is an exact dollar figure: $2350. That's the fee to renounce and exit the US tax system for good.

Seriously though, maybe it's not a problem. You could continue doing simple filings each year and not have any trouble. There's no reason to do so, it wasn't necessary, you gain no benefit from it, but at least it's not hurting you. Or you find the filings increasingly complicated and expensive as time goes on, and you even begin paying US taxes. 

Right now you could probably just stop filing and change banks (and not admit US citizenship to the new bank) and that would be the end of it, but you'd always have some uncertainty in the background. Also it's not clear what your employer's role might be - if they made you sign a W9 they might have some US connection? Just a guess on my part.

Out of curiosity, did you at any point contact a tax compliance firm for help? Did they ever suggest that with a non-US birthplace you could ignore this, or were they just happy to confirm your fears and take your money?


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## Jca1 (Aug 7, 2019)

This seems to cover all the (rather confusing) rules if you do decide to keep filing. I'd offer some advice, but after reading the article a couple times I'm not sure if I'm interpreting it correctly, and there are many caveats that depend on the exact details of your employee stock program.


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## Rubberducky (Nov 5, 2019)

Nononymous said:


> Also it's not clear what your employer's role might be - if they made you sign a W9 they might have some US connection? Just a guess on my part.
> 
> Out of curiosity, did you at any point contact a tax compliance firm for help? Did they ever suggest that with a non-US birthplace you could ignore this, or were they just happy to confirm your fears and take your money?


My employer does have strong ties to the US. So that might possibly be an issue.

I did contact a tax compliance firm, but never paid for their services. I only explained my case and asked about the non-filing of the stock gains. They said I should just do an amendment.


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## Nononymous (Jul 12, 2011)

Not entirely sure what the employer ties could mean. Normally US citizenship isn't an issue unless you have signing authority on accounts, which would then make them reportable on your FBARs, which is obviously a huge problem for all concerned. Not sure why you had to sign a W9 unless it's US stock - did non-US co-workers need to sign a W8? Bit mysterious but then it's not my area of expertise.

Otherwise, you know the situation now. It was not necessary or advisable to enter the US tax system, but you're in. If you continue filing, it might be easy and cost you nothing but time, but it's possible that you'll end up owing money due to various double-tax scenarios. It's also possible that financial institutions will deny you certain products or services if they know that you are a US citizen, but at least you can easily conceal that, being born outside the US. If filing becomes onerous or expensive, you have two basic options: renounce and exit the US tax system, or stop filing and go dark.

Alternatively, you could take advantage of the fact that you have citizenship in the world's greatest tax haven, so invest all your money in the US and hide it from the Belgian authorities. That's the virtue of US non-reciprocation - FATCA is a one-sided deal and they won't join CRS. Oh the irony.


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## Rubberducky (Nov 5, 2019)

Nononymous said:


> Not entirely sure what the employer ties could mean. Normally US citizenship isn't an issue unless you have signing authority on accounts, which would then make them reportable on your FBARs, which is obviously a huge problem for all concerned. Not sure why you had to sign a W9 unless it's US stock - did non-US co-workers need to sign a W8? Bit mysterious but then it's not my area of expertise.


Indeed, non-US employees signed a W8. What does that mean for this case?


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## Nononymous (Jul 12, 2011)

Rubberducky said:


> Indeed, non-US employees signed a W8. What does that mean for this case?


Typically the W9 (for US persons) and W8 (for non-US persons) is used to determine withholding rates, for example dividends on US investments or something. (I'm probably getting something wrong there, not a finance person.) The form is not actually submitted to the IRS, but kept on file so that in event of an audit the firm can show why some people got the US person withholding rate and others did not. But W9/W8 forms can also be used as all-purpose declarations of US person status for banks' FATCA compliance, or even for income declarations of offshore freelancers and so on. Main point being, they are not sent to the IRS, but are a way for individuals to sign off on their US person or non-person status. 

In this case I can only imagine it's because your options were US stock, and the company needs to know everyone's status to report or not report income or sale or whatever. Just a guess. By signing a W9 you have possibly triggered the company reporting some information to the IRS. Just a guess on my part though, really not an expert in this sort of thing. But it suggests that it's probably worth your while to amend the return. 

Was there any withholding, to your knowledge?

If you renounced you'd change your W9 to a W8. If you stopped filing and went dark I don't know what the implications would be in terms of your relationship to your employer - probably nothing, if you had signed a W9 you wouldn't be lying to them, you'd just be choosing not to file. Again, just guessing here.


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## Rubberducky (Nov 5, 2019)

Nononymous said:


> Typically the W9 (for US persons) and W8 (for non-US persons) is used to determine withholding rates, for example dividends on US investments or something. (I'm probably getting something wrong there, not a finance person.) The form is not actually submitted to the IRS, but kept on file so that in event of an audit the firm can show why some people got the US person withholding rate and others did not. But W9/W8 forms can also be used as all-purpose declarations of US person status for banks' FATCA compliance, or even for income declarations of offshore freelancers and so on. Main point being, they are not sent to the IRS, but are a way for individuals to sign off on their US person or non-person status.
> 
> In this case I can only imagine it's because your options were US stock, and the company needs to know everyone's status to report or not report income or sale or whatever. Just a guess. By signing a W9 you have possibly triggered the company reporting some information to the IRS. Just a guess on my part though, really not an expert in this sort of thing. But it suggests that it's probably worth your while to amend the return.
> 
> ...


First of all, I really want to thank . you again for all the information you're passing on. This is a huge help for me!

I do not know what 'withholding' means in this context. When the stock options were granted, I paid tax on them in Belgium. However, I was also told that additional taxes might be owed later on (I'm quite certain this would be Belgian taxes).


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## Nononymous (Jul 12, 2011)

Simple example that's probably incorrect.

You have US stocks that pay a dividend. If you are a US person (i.e. W9) then 15% of that dividend payment is withheld and sent to the IRS when it is paid. If you are not a US person (i.e. W8) then 30% is withheld. In both cases, you would potentially get some of that back when filing a return - the same as with employment income. 

I believe there are also different withholding rates for US pension and social security payments, but that can vary by country of residence depending on tax treaty - complicated and does not concern you.

All that being said, I don't understand how a W9 versus W8 would make a difference in terms of your stock options. Perhaps there is no difference but the company just needed everyone's US person status on record.


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## Bevdeforges (Nov 16, 2007)

Nononymous said:


> All that being said, I don't understand how a W9 versus W8 would make a difference in terms of your stock options. Perhaps there is no difference but the company just needed everyone's US person status on record.


In following this discussion, I'm still not clear if the stock on option is a US stock or a non-US one, perhaps one traded on the US stock exchanges. When I worked for a US company that granted stock options, I know it caused problems for the non-US employees (i.e. those working for foreign subsidiaries of the main US company).

But where the foreign employees had to submit W9s or W8s was where the company had a broker (in the US) that handled the options and stock trading activity for all employees.

The key thing for the OP going forward is to have some understanding of what information is actually available to the IRS and what information is not available to them. For example, working for a foreign subsidiary of a US company, you wouldn't receive a W2 - meaning that the IRS won't receive a W2 summarizing your wages. 

If this is the case, you could simply amend your return, including the same amount you wound up paying Belgian taxes on and let it go at that. If there was no W2 filed, they'll be relying on you to report whatever the amount it (kind of like they do with your wages). And, unless the amounts involved were really eye popping, you could actually just forget about it.

The one option that hasn't been proposed here is some form of "partial compliance." This basically means reporting on your US returns whatever the IRS has reason to know about - i.e. anything for which you receive a W2 or a 1099 form (which is submitted in duplicate to the IRS). Sort of a CYA approach ("cover your butt") but it seems to work for plenty of folks. Just a thought.


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