Contributed by KeriC, FreeTaxUSA, Tax Pro
Employee stock options and employee stock purchase plans (ESPP) can be used by employers as a form of compensation or as a benefit. Stock options and ESPPs can involve giving highly valued employees a certain amount of stock after a specified period of time at little to no cost or allowing all employees to purchase company stock at a slightly discounted cost. There are two types of employer stock options:
- Qualified or Statutory: Options granted under an employee stock purchase plan (ESPP) or an incentive stock option (ISO) plan are statutory stock options.
- Qualifying disposition: An ISO or ESPP must be held for a certain amount of time after the exercise and after the grant date to be considered a qualifying disposition.*
- Disqualifying disposition: An ISO or ESPP not held for the required time before selling the shares. It is then treated as a nonqualified or non-statutory stock option.
- Nonqualified or Non-statutory (NSO): Stock options that are NOT granted under an employee stock purchase plan or an ISO plan are non-statutory stock options.
If you are unsure what type of stock options you have, look at your option agreement or ask your employer.
The menu path for entering the sale of a stock option is Income < Common Income > Stocks or Investments Sold (1099-B).
All dispositions (sales) of stock option stocks will be reported as capital gains or losses. However, the cost basis information that needs to be entered may depend on what kind of stock option stock you had and how long you held the stock before selling.
For more information see:
Stock options
IRS Publication 525 (topic begins on Page 11)
*For tax years 2024 and prior, our software will NOT support reporting a qualified disposition. However, we anticipate adding support for tax year 2025.
