IRS Publication 525 — Taxable and Nontaxable Income

Form 1099 -Bwon’t reflect any amount you included in income upon grant or exercise of the option. For options granted before January 1, 2014, any basis information reported to you on Form 1099 -Bmay or may not reflect any amount you included in income upon grant or exercise; therefore, the basis may need to be adjusted.

Caution: It’s your responsibility to make any appropriate adjustments to the basis information reported on Form 1099 -Bby completing Form 8949.

Statutory Stock Options There are two kinds of statutory stock options.

• Incentive stock options (ISOs).

• Options granted under employee stock purchase plans.

For either kind of option, you must be an employee of the company granting the option, or a related company, at all times during the period beginning on the date the option is granted and ending 3 months before the date you exercise the option (for an ISO, 1 year before if you’re disabled). Also, the option must be nontransferable except at death. If you don’t meet the employment requirements, or you receive a transferable option, your option is a nonstatutory stock option. Grant of option. If you receive a statutory stock option, don’t include any amount in your income when the option is granted.

Exercise of option. If you exercise a statutory stock option, don’t include any amount in income when you exercise the option. Alternative minimum tax (AMT). For the AMT , you must treat stock acquired through the exercise of an ISO as if no special treatment applied. This means that, when your rights in the stock are transferable or no longer subject to a substantial risk of forfeiture, you must include as an adjustment in figuring alternative minimum taxable income the amount by which the FMV of the stock exceeds the option price. Enter this adjustment on Form 6251, line 2i. Increase your AMT basis in any stock you acquire by exercising the ISO by the amount of the adjustment. However, no adjustment is required if you dispose of the stock in the same year you exercise the option.

See Restricted Property , later, for more information. Your AMT basis in stock acquired through an ISO is likely to differ from your regular tax basis. Therefore, keep adequate records for both the AMT and regular tax so that you can figure your adjusted gain or loss.

Example 7. Your employer, Elm Company, granted you an ISO on April 8, 2024, to buy 100 shares of Elm Company at $9 a share, its FMV at the time. You exercised the option on January 7, 2025, when the stock was selling on the open market for $14 a share. On January 27, 2025, when the stock was selling on the open market for $16 a share, your rights to the stock first became transferable. You include $700 ($1,600 value when your rights first became transferable minus $900 option price) as an adjustment on Form 6251, line 2i.

Tip: If you exercise an ISO during 2025, you should receive Form 3921, or a statement, from the corporation for each transfer made during 2025. The corporation must send or provide you with the form by January 31, 2026. Keep this information for your records. Sale of the stock. You have taxable income or a deductible loss when you sell the stock that you bought by exercising the option. Your income or loss is the difference between the amount you paid for the stock (the option price) and the amount you receive when you sell it. You generally treat this amount as capital gain or loss and report it as explained in the Instructions for Schedule D (Form 1040) for the year of the sale.

However, you may have ordinary income for the year that you sell or otherwise dispose of the stock in either of the following situations.

• You don’t satisfy the holding period requirement.

• You satisfy the conditions described under Option granted at a discount under Employee stock purchase plan, later. Your employer or former employer should report the ordinary income to you as wages in box 1 of Form W-2, and you must report this ordinary income amount on Form 1040 or 1040 -SR, line 1a. Enter on Schedule 1 (Form 1040), line 8k, any income from the exercise of stock options not otherwise reported on Form 1040 or 1040-SR, line 1a.

For options granted on or after January 1, 2014, the basis information reported to you on Form 1099 -Bwon’t reflect any amount you included in income upon grant or exercise of the option. For options granted before January 1, 2014, any basis information reported to you on Form 1099 -Bmay or may not reflect any amount you included in income upon grant or exercise; therefore, the basis may need to be adjusted.

Caution: It’s your responsibility to make any appropriate adjustments to the basis information reported on Form 1099 -Bby completing Form 8949.

Holding period requirement. You satisfy the holding period requirement if you don’t sell the stock until the end of the later of the 1 -year period after the stock was transferred to you or the 2-year period after the option was granted. However, you’re considered to satisfy the holding period requirement if you sold the stock to comply with conflict-of-interest requirements. Your holding period for the property you acquire when you exercise an option begins on the day after you exercise the option.

ISOs. If you sell stock acquired by exercising an ISO, you need to determine if you satisfied the holding period requirement.

Holding period requirement satisfied. If you sell stock acquired by exercising an ISO and satisfy the holding period requirement, your gain or loss from the sale is capital gain or loss. Report the sale as explained in the Instructions for Schedule D (Form 1040). The basis of your stock is the amount you paid for the stock. Holding period requirement not satisfied. If you sell stock acquired by exercising an ISO, don’t satisfy the holding period requirement, and have a gain from the sale, the gain is ordinary income up to the amount by which the stock’s FMV when you exercised the option exceeded the option price. Any excess gain is capital gain. If you have a loss from the sale, it’s a capital loss and you don’t have any ordinary income.

Your employer or former employer should report the ordinary income to you as wages in box 1 of Form W-2, and you must report this ordinary income amount on Form 1040 or 1040-SR, line 1a. If your employer or former employer doesn’t provide you with a Form W -2, or if the Form W -2 doesn’t include the ordinary income in box 1, you must report the ordinary income as wages on Schedule 1 (Form 1040), line 8k, for the year of the sale or other disposition of the stock. Report the capital gain or loss as explained in the Instructions for Schedule D (Form 1040). In determining capital gain or loss, your basis is the amount you paid when you exercised the option plus the amount reported as wages.

Example 8. Your employer, Oak Corporation, granted you an ISO on March 12, 2023, to buy 100 shares of Oak Corporation stock at $10 a share, its FMV at the time. You exercised the option on January 7, 2024, when the stock was selling on the open market for $12 a share. On January 27, 2025, you sold the stock for $15 a share. Although you held the stock for more than a year, less than 2 years had passed from the time you were granted the option. In 2025, you must report the difference between the option price ($10) and the value of the stock when you exercised the option ($12) as wages. The rest of your gain is capital gain, figured as follows. Selling price ($15 × 100 shares) … $ 1,500 Purchase price ($10 × 100 shares) … − 1,000 Gain … $ 500 Amount reported as wages [($12 × 100 shares) − $1,000] … − 200 Amount reported as capital gain … $ 300 Employee stock purchase plan. If you sold stock acquired by exercising an option granted under an employee stock purchase plan, you need to determine if you satisfied the holding period requirement.

Holding period requirement satisfied. If you sold stock acquired by exercising an option granted under an employee stock purchase plan, and you satisfy the holding period requirement, determine your ordinary income as follows. Your basis is equal to the option price at the time you exercised your option and acquired the stock. The timing and amount of pay period deductions don’t affect your basis. Example 9. Pine Company has an employee stock purchase plan. The option price is the lower of the stock price at the time the option is granted or at the time the option is 12 Publication 525 (2025)