If a company grants you stock options outside a stock-purchase or incentive plan, it's a nonstatutory option. The tax-reporting requirements depend on whether you can determine the value of the option. If the stock is traded on an established market and you have the right to exercise the option and sell the stock immediately, you can set a value on the option. If the option doesn't meet those conditions, you can't determine the value and must report taxes differently. You pay taxes a second time when you sell your stock.
Calculate the value of your option. If you can buy 100 shares at $10 apiece when the price is $100, for example, the option is worth $9,000 in compensation. If your stock option doesn't have a measurable value when you receive it, make this calculation when you finally exercise the option.
Report the option on your 1040 as income at the appropriate time -- after you receive it or after you exercise it. You'll see the amount listed on your W-2 if you're an employee, or on a 1099 form for non-employees.
Add the original purchase price to the taxable income you reported on the option. The total is your basis -- the amount you use to figure your tax when you sell the stock you bought.
Subtract your basis from the proceeds of your stock sale. The result tells you whether you pay taxes on your sale, or have a loss you can write off.
Report the results on Schedule D. If you held the stock less than a year, you pay short-term capital gains tax on profits from the sale. If it's longer than a year, you can use long-term capital gains rates.
- If you sell the option before you exercise it, report the money you receive as income. If you give it away or sell it for less than market value, you also report income when the recipient exercises the option. To figure the second amount, add the exercise price to whatever you received for the sale to get your basis. The value of the stock above that figure is your income from the exercised option.