Stock Options: What Corporate Execs Should Know About Amended Rule 10b5(1)

Corporate executives and other “insiders” are forbidden from trading on material, non-public information.

When it comes to stock options, every public filing and formal announcement from a publicly traded firm comes with a blackout period for “insiders.” So, how can executives realize their earned gains without the threat of insider trading?

The U.S. Securities and Exchange Commission (“SEC”) defines illegal insider trading as: “The buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, non-public information about the security.

In an effort to provide guidance, the SEC enacted Rule 10b5-1 in 2000 to create a defense against insider trading if the following criteria are followed:

  • Enter into a Rule 10b5-1 plan in good faith.
  • Adopt a trading plan that is not within a blackout period.
  • Specify the timing, price and amount of your transactions.

In December 2022, the SEC enacted additional requirements for the 10b5-1 plans.

“Over the past two decades, though, we’ve heard from courts, commenters and members of Congress that insiders have sought to benefit from the rule’s liability protections while trading securities opportunistically on the basis of material nonpublic information,” said SEC Chair Gary Gensler. “I believe today’s amendments will help fill those potential gaps.”

The new requirements alter the steps that corporate executives and “insiders” must take to fall under the 10b5-1 safe harbor, such as:

  • As part of the 10b5-1 plan, executives must certify that they are not aware of any material non-public information about the issuer or its securities and that the plan is adopted in good faith.
  • The good faith requirements must be extended beyond adoption through the entire duration of the plan.
  • Directors and officers may not trade during the later of 90 days after plan adoption or modification or two business days after filing a Form 10-Q or Form 10-K. Insiders who are not directors or officers may trade after a 30-day period following adoption or modification.
  • The 10b5-1 defense is no longer applicable if the “insider” has more than one 10b5-1 plan for the same time period.
  • Issuers must make new disclosures in their reports, including names and titles of “insiders,” dates of plan adoption or termination and number of shares that are planned to be bought or sold.

Accordingly, corporate executives and “insiders” must be familiar with the above changes to the 10b5-1 plans.

How Stock Options Overtook Cash

Two decades ago, corporate executives were compensated mainly with cash and bonuses, while stock options were footnotes. But the drive to link pay and performance has increased over the years, putting equity at the forefront. According to a 2021 Associated Press study, a little more than a quarter of compensation for the typical CEO at an S&P 500 company came from salary or bonuses. At the top, cash makes up 5% of total compensation.

The shift to stock options carries more responsibility for corporate executives. Insider trading, for example, can cost up to 20 years in prison. Back in 2020, the SEC employed 1,300 staff members in its Enforcement Division and budgeted more than half a billion dollars to investigate and prosecute illegal insider trading cases.

An attorney with expertise in complex financial instruments like stock options can help you regain peace of mind about your compensation package.

(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203-658-8455 or

How to Use Specific Allocation Cost Basis to Manage Capital Gains Taxes on Cryptocurrency Gains

The cryptocurrency reporting rules have changed but compliance requirements have not been made any clearer. The recent changes in the tax reporting requirements have left crypto platforms, brokers, and traders with minimal guidance and exposed buyers and sellers to a potential tax trap.

This note illustrates a process by which taxpayers who engage in virtual currency transactions can properly report their taxable gains or losses, even in the absence of revised guidance from the IRS. This process, properly deployed, will save many taxpayers who sell cryptocurrency during the tax year substantial amounts of money in federal taxes.

Section 80603 of the Infrastructure Investment and Jobs Act, P.L. 117-58 (signed into law November 15, 2021) amends both Section 6045 and 6045A of the Internal Revenue Code to accomplish three significant changes in the tax law related to returns of brokers regarding digital assets:

  • Brings digital assets under the broker reporting requirements by:
    • Adding to the definition of “broker” for purposes of information reporting “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” Code §6045(c)(1)(D)(effective for returns required to be filed and statements required to be furnished after December 31, 2023) and
    • At §6045(g)(3)(B)(iv), adding digital assets to the scope of covered securities for purposes of Code §6045(g)(2)(a). This addition has the effect of requiring the newly-expanded population of persons treated as brokers under the tax law to report the capital gains and losses of persons disposing of digital assets on Form 1099-B. Reg. §1.6045-1(d)(2)
  • Defines a digital asset as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology” and includes an exception deferring to other and further definitions as may be promulgated by the Treasury. §6045(g)(4)

Cryptocurrency exchanges, such as Binance, Coinbase Exchange, Kraken, KuCoin, and OKX are now explicitly required to provide information reporting on Form 1099-B. However, the IRS has recognized that the existing reporting regulations do not contemplate virtual currency and so, in Announcement 2023-2 (December 23, 2022), the Service relieved brokers from the new reporting requirements pending issuance of final regulations under the new law. Taxpayers, however, remain responsible for reporting the proceeds of the virtual currency dispositions.

Taxpayers must report the nature and magnitude of their gains and losses on dispositions of digital assets whether or not any exchange or platform reports their transactions. This leaves responsibility for accurate recordkeeping squarely, and exclusively, on the taxpayer disposing of the assets. Indeed, decentralized finance exchanges such as Idex and dYdX, which do not collect Know Your Customer information (See, 31 CFR 1023.220), and self-custody traders, which do not provide information reporting, have no present role in tax reporting.

On whatever form — 1099-B, 1099-K, or no reporting form at all  —  a taxpayer receives regarding information reported to the IRS about the proceeds from the disposition of digital assets, that information must be translated into its tax effects via Form 8949, then to Schedule D, and, ultimately, to Form 1040. This reporting array provides to the IRS information describing the assets, the dates of acquisition and disposition, basis calculation, and the resulting gain or loss from each asset disposition. It also serves to characterize the resulting gain or loss as ordinary or capital and, if capital, as either long or short term. See, Code §1222; Reg. §§1.6045-1(d)(2)(i) and (ii).  Capital gains, calculated using the netting rules of §1222(11), are, generally, taxed at more favorable rates than ordinary income. Code §§1(h)(1) and (j)(5).

Gains on the disposition of capital assets, including covered securities, are calculated by subtracting the cost or other basis of the property from the net amount realized from its disposition. See, Reg. §1.1011-1. This amount is reported by the exchange or broker on Form 1099-B and, in turn, by the taxpayer on Form 8949.

This two-step process includes a mathematical trap for the unwary, which the IRS tacitly acknowledges in its virtual currency FAQs released October 9, 2019 (IR-2019-167). These FAQs largely reflect the two methods of basis allocation provided in the regulations that are available to a taxpayer who sells less than their entire position in a virtual currency account. However, because the regulations (Reg. §§1.6045-1(d)(2)(i) and (ii)) were promulgated prior to the explicit addition of digital assets to the statutory information reporting scheme by Section 80603 of P.L. 117-58, the Service has issued this interim guidance to remind such taxpayers that their basis reporting for digital assets may be accomplished in either of two ways:

  • Identification of the specific units of virtual currency that were sold. Such specific identification must include

(1) the date and time each unit was acquired

(2) the taxpayer’s basis and the fair market value of each unit at the time it was acquired

(3) the date and time each unit was sold, exchanged, or otherwise disposed of, and

(4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit or

  • If the taxpayer does not identify specific units of virtual currency, the units are deemed to have been sold, exchanged, or otherwise disposed of in chronological order beginning with the earliest unit of the virtual currency purchased or acquired; that is, on a first in, first out (FIFO) basis

FAQs 40 and 41.

Recall that Form 1099-B, when used by crypto exchanges and brokers for reporting sales of less than a taxpayer’s entire position, reports in Box 1(e) only the summary figure of cost or other basis, without specifying how that basis is calculated. The regulations and the FAQs prescribe that the FIFO method is the default basis reporting calculation in the absence of information adequate to support allocation of basis to specific units of digital currency.

Form 1099-B is, however, not the end of the taxpayer’s analysis. This is important because Form 8949, generally required to be filed with the return of a taxpayer who has sold capital assets (now, including digital assets) during the tax year, enables the taxpayer to correct the basis reported on Form 1099-B.  Brokers and exchanges will, as a rule, simply report out capital gain on a FIFO basis, potentially leaving inattentive taxpayers with a larger tax bill than they would have with proper figuring.


Here is how capital gains tax exposure can be unnecessarily inflated for a seller of digital assets who does not liquidate his or her entire position during the year.

The comparison may be illustrated with these pricing data from a popular digital currency over a recent period where a hypothetical taxpayer invested in a single unit of the asset each calendar month at its then-prevailing price.

Comparison of Capital Gains Tax on Sale of Virtual Currency Positions Using FIFO and Specific Information Basis Allocation

Comparison of Long Term Capital Gain Tax Using FIFO and Specific Identification Methods of Basis Allocation

A taxpayer who partially liquidates a digital currency position, then, should make strategic use of the Form 8949, whether or not the taxpayer receives an information statement from a broker or exchange. Note that for each transaction type for which Part I, Box (A), (B), or (C), or Part II, Box (D), (E), or (F) is checked, a separate Form 8949 must be filed.

The taxpayer should complete the appropriate part of the form (Part I for Short Term Capital Assets, Part II for Long Term Capital Assets) and enter in column (e) the appropriate basis allocation. If the taxpayer elects to use the Specific Identification method for a partially liquidated position, he or she should be prepared to document the claim with

  • The date and time each unit was acquired;
  • The basis and fair market value of each unit at the time acquired;
  • The date and time each unit was sold, exchanged or otherwise disposed of;
  • The fair market value of each unit when disposed of; and
  • The amount of money or the value of property received for each unit

FAQ 39.

In circumstances where the allocated basis of the liquidated asset varies from the amount stated in Box 1(e) on the Form 1099-B or other information statement, the taxpayer should enter Code B in column (f) and enter the amount by which the stated basis is being adjusted on the Form 8949. The current amount of gain or loss should then be entered in column (h).

The total amounts on Line 2 in Parts I and II of Form 8949 should then be transferred to Schedule D as follows:

  • If Part I, Box A is checked, transfer the amount in Part I, line 2 to line 1b of Schedule D
  • If Part I Box B is checked, transfer the amount in Part I, line 2 to line 2 of Schedule D
  • If Part I, Box C is checked, transfer the amount it Part I, line 2 to line 3 of Schedule D
  • If Part II, Box D is checked, transfer the amount in Part II, line 2 to line 8b of Schedule D
  • If Part II, Box E is checked, transfer the amount in Part II, line 2 to line 9 of Schedule D
  • If Part II, Box F is checked, transfer the amount in Part II, line 2 to line 10 of Schedule D

In conclusion, the responsibility of accurate capital gains reporting for digital asset transfers remains in the hands of the taxpayer. Because of the present gap between the statutory information reporting requirements and the associated regulations and forms, taxpayers must pay particular attention to how they elect and calculate basis in transactions that both were and were not reported to them or, in some circumstances, to the IRS, and whether such transactions affected long term or short-term capital assets. While taxpayers may, in most cases, benefit significantly from the Specific Identification method of basis allocation, they should be cautioned to invoke it only when they can meet the prescribed documentation to support that method. Otherwise, the default FIFO allocation should be used.

This note illustrates general principles only and is not intended as tax or legal advice. The reader is cautioned to discuss his or her specific circumstances with a qualified professional before taking any action.

Pastore LLC Sponsors Digital Assets Connection 2023

Pastore LLC attended the Digital Assets Connection 2023 as a sponsor on June 7, 2023. This third iteration of the conference, which was formerly known as Crypto Connection, saw approximately 250 attendees, speakers, and sponsors join together for meaningful and innovative dialogue about the digital asset industry. Central topics included stablecoin and payment tokens, current trading and exchange environments for centralized and decentralized finance, and digital asset custody, utility, and purpose.

At Digital Assets Connection 2023, Pastore LLC representatives discussed with other attendees the difficulties that arise from ambiguous or insufficient regulations, the importance of making a good faith effort to comply, and projections for the future of public policy in the industry. As a firm that applies a long history of practice in traditional finance to the realm of decentralized financial platforms, Pastore LLC can advise clients on best practices for compliance with regulations related to digital assets.

Pastore LLC was proud to sponsor the event alongside co-sponsors such as LMAX Group, Ciphertrace – Mastercard, Hedera, BSO, Wilkie Farr & Gallagher LLP, Prometheum, INX, Oasis Pro Markets, Chainlink Labs Aon, Cboe Digital, Ledgible Crypto Tax & Accounting, NODE40, American Crypto Academy, XTRD, and Astra Engine. More information about the forum can be found at