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NQSOs: Taxes
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How is the spread at exercise of an NQSO taxed for federal income-tax purposes?
The full spread is included in your gross income for the year of exercise as ordinary income, and it is taxed accordingly. It is subject to mandatory supplemental wage withholding. The income and withholding taxes will appear on your W-2 in the appropriate boxes, as illustrated in another FAQ. In calculating the amount of compensation income, the spread is not reduced by any brokerage commission should you sell the stock in a same-day/cashless exercise. See the relevant FAQs in the Tax Center for how to report this on your tax return.
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