When I hold NQSO shares after exercise, what tax applies when I later sell the stock at a gain?
You are taxed on your capital gains, as with any stock you purchase. Capital gains tax applies on the amount of your gains above your tax basis after exercise. Long-term capital gains rates apply when you hold the stock more than one year after exercise.
Example: You receive a grant of NQSOs and exercise them after vesting.
- Your exercise price is $12.
- The market price (used to calculate the spread at exercise) is $18.
- You sell the stock when the price is $26.
- You have $6 per share ($18 – $12) of ordinary income at exercise.
- You sell the shares more than one year later.
- You have $8 ($26 – $18) of capital gains at sale.
- The capital gains are taxed at 15% or 20%, depending on your income.
On your tax return, you report capital gains with Form 8949 and Schedule D of IRS Form 1040. For details, including annotated examples of the tax-return reporting for sales of NQSO stock, see the Tax Center. Should you instead sell the stock at a loss, you will have a capital loss.