Tax planning and compliance for investors Free Newsletter. Tax consequences when you sell stock obtained by exercising a nonqualified stock option. When you exercise a nonqualified stock option you report ordinary compensation income. But when you sell the stock you report capital gain or loss. Your basis for the stock used to determine how much gain or loss you report includes the amount of income you reported for exercising the option, so you don't get taxed twice on the same amount.

For many people, a sale of stock from a nonqualified option is the first experience in selling stock. If you aren't familiar with the rules it may appear that the income is being taxed twice.

Have no fear, that won't happen. When you sell stock through a broker you'll receive a form reporting the results of that sale: This form does not tell how much gain or loss to report.

It merely tells how much you received from the sale. It's up to you to figure how much gain or loss you report from the sale. To do this you need to know your basis for the stock. Normally your basis for stock is simply your cost for the stock including brokerage commission, if any.

Understanding Your Options- Tax Implications of Stock Options

But there's a special rule for stock from nonqualified options. When you exercise a nonqualified option, your basis is equal to the amount you pay for the shares plus the amount of income you report for exercising the option. In general this means your basis will be equal to the value of the stock on the date you exercised the option.

Subtract your basis from the amount you received in the sale of your shares to determine your gain or loss. You have a capital loss if the result is a negative number; otherwise you have a capital gain.

It isn't enough to know the amount of your gain or loss. You also need to know your holding period. That lets you know whether your gain or loss is short-term or long-term. Your holding period for this stock begins when you exercise the option.

You can't include the time you held the option. If you sell the stock one year or less after you exercised the option your gain or loss is short-term. You have to wait a year and a day to get long-term gain. A publication of Fairmark Press Inc.

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Tax Topics - Topic Stock Options

Compensation in Stock and Options. Sale of Stock from Nonqualified Options By Kaye A.

Nonqualified Stock Options | H&R Block®

Related Consider Your Options book for people who receive stock options Equity Compensation Strategies book for professional advisors Alternative Minimum Tax free online guide AMT and Equity Compensation forum for questions and comments on this topic Special Taxes easy access to forms for AMT or AMT credit. Our books That Thing Rich People Do The fastest, easiest way to learn the principles of investing. Our complete guide to Roth IRAs and Roth accounts in k and similar plans: Consider Your Options A plain-language guide for people who receive stock options or other forms of equity compensation.

Sale of Stock from Nonqualified Options

Equity Compensation Strategies A text for financial advisors and other professionals who offer advice on how to handle equity compensation including stock options. Capital Gains, Minimal Taxes Tax rules and strategies for people who buy, own and sell stocks, mutual funds and stock options.

That Thing Rich People Do. A plain-language guide for people who receive stock options or other forms of equity compensation. A text for financial advisors and other professionals who offer advice on how to handle equity compensation including stock options.

Capital Gains, Minimal Taxes. Tax rules and strategies for people who buy, own and sell stocks, mutual funds and stock options.