How am I taxed on Nonqualified Stock Options (NQSOs)? I exercised and sold stock options last year, and the dollar amount seems to be reported on both my W–2 and 1099–B.
Nonqualified Stock Options (NQSOs) do not meet certain IRS requirements that allow for special tax treatment. With NQSOs, you will generally be taxed when you exercise the stock options and when you sell the stock acquired on exercise. There are two separate tax transactions that take place. First, when you exercise your option, the difference between the fair market value of the option at the time of exercise and the exercise price is reported to you as wages on which you will be required to pay ordinary income taxes. This amount is reported on your W–2 as wages. Second, when you sell the stock you acquired on exercise (even in an “exercise–and–sell” transaction), the difference between the cost basis of the stock acquired upon exercise and the proceeds from the sale is taxable to you as capital gains or losses. The proceeds generated upon sale are reported on your 1099–B.
