How is compensation from nonstatutory stock options reported on Form W-2 if not recognized at grant?

When reporting compensation from nonstatutory stock options on Form W-2, it is important to recognize that the tax implications arise when the options are exercised. The correct answer involves the fair market value of the stock at the time of exercise compared to the exercise price of the options.

The fair market value over the exercise price at the time of exercise reflects the gain that the employee realizes at that moment. This amount is considered ordinary income and must be included in the employee's wages for the year in which the options are exercised. To properly report this income, it is denoted with a "V" in box 12 of Form W-2.

This reporting mechanism ensures that the income derived from exercising nonstatutory stock options is accurately tracked and taxed. It is essential for employees to understand this process as it impacts their overall tax liability and the availability of deductions or credits associated with their income.

In summary, the correct reporting of compensation from nonstatutory stock options is based on the fair market value of the stock at the time of exercise in relation to the exercise price, thereby clarifying the nature of the income that must be reported as part of the employee's earnings.