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Non-qualified stock options give employees the right, within a designated timeframe, to buy a set number of shares of their company's shares at a preset price. It may be offered as an alternative form of compensation to workers and also as a means to encourage their loyalty with the company. 1?
Non-qualified stock options (NSOs) provide employees and other stakeholders with the right (but not the obligation) to purchase shares of company stock at a predetermined price. NSOs can be profitable if a company's stock price rises more than the exercise price.
Form W-2 (or 1099-NEC if you are a nonemployee) Your W-2 (or 1099-NEC) includes the taxable income from your award and, on the W-2, the taxes that have been withheld. This form is provided by your employer. Form 1099-B This IRS form has details about your stock sale and helps you calculate any capital gain/loss.
Early exercising allows you to purchase your stock options before they vest when the strike price and FMV are equal or negligible, so you trigger very little or no additional taxes when exercising.
The income related to the option exercise should be included in the Form W-2 you receive from your employer or 1099-NEC from the company if you are a non-employee. Any capital gain or loss amount may also be reportable on your US Individual Income Tax Return (Form 1040), Schedule D and Form 8949 in the year of sale.
This is simple: if you have confidence in the company, it is almost always better to exercise than let your hard-earned options drop off the table for nothing. If you have already left the company, then you need to know how long you have before your options expire.
In most cases, options can be closed (rather than exercised) through offsetting transactions prior to expiration. It doesn't make a lot of sense to exercise options that have time value because that time value will be lost in the process.
A stock option may be worth exercising if the current stock price (also known as the fair market value or FMV*) is more than the exercise price.