How to Report Nonstatutory Stock Options

by Mark P. Cussen

Overview

Taxation of stock options can be a tricky issue, depending on the type of options that you are granted. Some options are taxed in a fairly straightforward manner, while others have more complex issues to consider. Nonstatutory stock options fall into the former category.

Stock Exchange

Step 1

Find out whether the options you have been granted have a readily determinable value. If your company's stock is publicly traded, then its value is simple---the fair market price of the stock. If not, then your stock may require an appraisal to determine its value.
Step 2

Treat your nonstatutory stock options as compensation in the year you receive them if you like. But you can defer the taxation on your options until the year they are vested if you prefer (this is what most employees do).
Step 3

Include the fair market value of the stock in your income when you become able to exercise your options. Therefore, you must know the exercise date of your options. Be sure to subtract the amount you initially paid for the options when you exercise them.
Step 4

Report any dividends that you receive on your nonstatutory stock options the same as any other dividends that you receive from shares of stock you own. You must report these dividends as income in the year that you exercise the options. List them on Schedule B if your employer did not include them on your W-2 form.