Example: You have stock options with a $10 exercise price. You exercise them after vesting when the price of your company stock is $12. You have a $2 spread ($12 – $10) and thus $2 in ordinary income. You will also have tax withholding when you exercise the NQSOs.
The proceeds when you sell the shares, whether immediately in a same-day sale or after a holding period, are taxed under the rules for capital gains and losses. You report the stock sale on Form 8949 and Schedule D of your IRS Form 1040 tax return.
For a detailed explanation of the tax rules, see the content sections NQSOs: Taxes, NQSOs: Taxes Advanced, and the related sections of the Tax Center on this website.
Got another minute? Watch our 60-second take on the top five things you need to know about the taxation of NQSOs.