How to Report Employee Stock Options Sold on a W2

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Stock options are one way to reward employees.
Stock options are one way to reward employees. (Image: Duncan Smith/Photodisc/Getty Images)

Employee stock options can be a useful form of compensation that allow an employee to directly benefit from a successful company's rising stock price. However, the profit made from stock options may be subject to taxes. Understanding how that works and how to report the transaction can be useful both for planning purposes and for avoiding penalties and fines.

Determine if the employee stock options were statutory or nonstatutory stock options. Statutory stock options are not reportable as income on the employee's W2 form. All incentive stock options are statutory stock options.

If nonstatutory stock options were exercised in the year after the year in which the option was earned, then it does need to be reported on the employee's W2 form.

Calculate the excess of the fair market value of stock received upon exercise over the amount paid for the stock option (generally the sale proceeds minus the amount paid to exercise the options).

Add the calculated value to Box 1 of the employee's W2 form, along with any other wages and compensation.

Report code "V" and the calculated amount in Box 12 of the employee W2 form.

Tips & Warnings

  • All incentive stock options are statutory stock options, and do not result in any amounts being reported on the employee's W2 form.

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