Reporting stock options.
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How to Report Non-Statutory Stock Options.
Accurate records ensure that income from stock options is correctly reported for tax calculation. Non-statutory stock options are grants to employees to purchase shares of company stock. They are "non-statutory" because recipients do not obtain any special benefits under the income tax statutes. Income is taxable when the options are exercised. The difference between the option exercise price—the cost to buy the stock—and the value of the stock on the exercise date is an immediately taxable profit. That amount is added to the employee's W-2 and taxed as ordinary compensation. The employee has a capital gain when the stock is sold.
Reporting Steps.
Examine Box 1 of your Form W-2. It should be a higher amount than your annual salary. The increase is your income from exercising the stock options. Your employer will provide details on the amount in Box 1 to ensure that it includes salary, plus the difference between the option exercise price and the value of stock purchased on the exercise date.
Enter on Line 7 of Form 1040 the amount from Box 1 of your W-2. Include W-2 income from other employers, including the W-2 of a spouse if you file a joint tax return. Add the income from exercising the stock options if that amount is not already on your W-2.
Record the option exercise date in the first column of the ledger.
Write the market value of the stock on the option exercise date in the next ledger column. Label the column "cost basis."
Keep the ledger as a record of your purchase date and cost basis. Use this to determine taxable gain or loss when the stock is sold.

Reporting stock options

If you receive an option to buy stock as payment for your services, you may have income when you receive the option, when you exercise the option, or when you dispose of the option or stock received when you exercise the option. There are two types of stock options:
Options granted under an employee stock purchase plan or an incentive stock option (ISO) plan are statutory stock options . Stock options that are granted neither under an employee stock purchase plan nor an ISO plan are nonstatutory stock options .
Refer to Publication 525, Taxable and Nontaxable Income , for assistance in determining whether you've been granted a statutory or a nonstatutory stock option.
Statutory Stock Options.
If your employer grants you a statutory stock option, you generally don't include any amount in your gross income when you receive or exercise the option. However, you may be subject to alternative minimum tax in the year you exercise an ISO. For more information, refer to the Form 6251 (PDF). You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don't meet special holding period requirements, you'll have to treat income from the sale as ordinary income. Add these amounts, which are treated as wages, to the basis of the stock in determining the gain or loss on the stock's disposition. Refer to Publication 525 for specific details on the type of stock option, as well as rules for when income is reported and how income is reported for income tax purposes.
Incentive Stock Option - After exercising an ISO, you should receive from your employer a Form 3921 (PDF), Exercise of an Incentive Stock Option Under Section 422(b) . This form will report important dates and values needed to determine the correct amount of capital and ordinary income (if applicable) to be reported on your return.
Employee Stock Purchase Plan - After your first transfer or sale of stock acquired by exercising an option granted under an employee stock purchase plan, you should receive from your employer a Form 3922 (PDF), Transfer of Stock Acquired Through an Employee Stock Purchase Plan under Section 423(c) . This form will report important dates and values needed to determine the correct amount of capital and ordinary income to be reported on your return.
Nonstatutory Stock Options.
If your employer grants you a nonstatutory stock option, the amount of income to include and the time to include it depends on whether the fair market value of the option can be readily determined .
Readily Determined Fair Market Value - If an option is actively traded on an established market, you can readily determine the fair market value of the option. Refer to Publication 525 for other circumstances under which you can readily determine the fair market value of an option and the rules to determine when you should report income for an option with a readily determinable fair market value.
Not Readily Determined Fair Market Value - Most nonstatutory options don't have a readily determinable fair market value. For nonstatutory options without a readily determinable fair market value, there's no taxable event when the option is granted but you must include in income the fair market value of the stock received on exercise, less the amount paid, when you exercise the option. You have taxable income or deductible loss when you sell the stock you received by exercising the option. You generally treat this amount as a capital gain or loss. For specific information and reporting requirements, refer to Publication 525.

Reporting Sales of Nonqualified Option Stock.
By Kaye A. Thomas.
Current as of January 11, 2015.
It’s trickier than it should be to correctly report sales of nonqualified option stock.
Cashing in a nonqualified stock option (sometimes called a nonstatutory stock option) involves, at least from a tax perspective, two distinct transactions: you use the option to buy shares of stock, and you sell these shares. Often the two transactions happen simultaneously as a single event, but your tax return has to reflect two.
Tax reporting for the first one, exercise of the option, usually doesn’t require any special attention. Normally this event produces compensation income equal to the profit that was built into the option at the time you exercised. For example, if you paid $15 per share when the stock was trading at $20, you report $5 per share in compensation income. For an employee, this income is included in the wages reported on Form W-2, and non-employees should see it reflected on Form 1099-MISC. Unless there was a mistake by the company that granted the option, your compensation income from exercising the option will be correctly reflected on your tax return if you simply report the amounts on Forms W-2 and 1099-MISC as you normally would.
Not so the second part of the transaction. You need to report the sale of the shares, and in this case you should not trust the form you receive. You need to track down the correct information on your own.
All about that basis.
When you sell stock, including stock from exercising a nonqualified option, your gain or loss is the difference between your proceeds (the amount you received in the sale, net of broker’s commission and any other expenses of selling) and your basis for the shares. You should receive Form 1099-B from the broker, providing information to you (and to the IRS) about the transaction.
One item of information on that form is the proceeds of the sale. You should be able to rely on this number. The form may also state the basis of the shares. Don’t rely on this number!
For stock acquired by exercising a nonqualified option, the basis shown on Form 1099-B will generally be incorrect. This is not the broker’s fault, but rather due to a foul-up in the way the cost basis reporting regulations were written. For background see The Sorry State of IRS Guidance on Nonqualified Options.
Since you can’t rely on the broker’s number, you’ll have to determine the basis on your own. The basic rule here is that your basis is the sum of (a) the amount you paid for the shares (that is, the exercise price of the option) and (b) the amount of compensation income you reported in connection with the exercise of the option. There are a few details that may require your attention in applying this rule, and these are explained in Stock from Nonqualified Options.
This sale of stock will appear on Form 8949. If the broker did not report basis, or you’re able to determine that the broker reported the correct basis (which is unlikely but possible), you’ll enter the correct basis in column (e) and complete the rest of the form as indicated.
No trouble.
The problem is how to handle the situation where you have a Form 1099-B on which the broker reported incorrect basis. Don’t panic! The IRS understands that this will frequently happen and provides a way for you to make the adjustment.
On Form 8949 in column (e) you’ll show the basis reported by the broker, even though you know it’s incorrect. In column (f) you’ll write BO, codes indicating that the broker reported incorrect basis, and that the reason was “other” (that is, other than any of the reasons for which a specific code is provided). In column (g) you’ll show the amount of adjustment to gain or loss that’s needed to arrive at the correct result.
Think negative. In the usual case, the basis reported by the broker is incorrect because the adjustment for income reported on exercise of the option is omitted. This is a positive adjustment to basis, but the form calls for an adjustment to gain or loss . Basis is subtracted to determine gain or loss, so this is a negative adjustment, which should be shown in parentheses.
Here’s an example where you exercised and sold the same day. We’re omitting the first three columns, where you would describe the stock and list the dates of purchase and sale. The exercise price of the option was $6,000, and that’s what the broker reported as the basis of the shares. The stock was valued at $11,000, resulting in a built-in profit of $5,000, so that’s the amount of compensation income you reported, and also the amount of the basis adjustment, which becomes a negative number in column (g). The proceeds were a little less than $11,000, reflecting a brokerage commission and a small discrepancy between the value used to determine compensation income and the price at which the shares were actually sold.
Note that if you failed to make this adjustment, and instead relied on the basis reported by the broker, you would pay tax on a phantom gain of $4,948 instead of claiming a loss of $52.
Form 8949 Basis Adjustment.
You should also attach a statement explaining the adjustment, like this:
Form 8949, sale of XYZ stock, broker failed to adjust basis for compensation income reported on exercise of compensatory option.