- Yes, generally you exercise your option through your employer, and your employer will usually report the amount of your income on line 1 of your Form W-2 as ordinary wages or salary and the income will be included when you file your tax return. Your company will usually withhold ordinary income tax (including federal, payroll and any applicable state taxes). If there was no cash involved in the transaction, you might have paid your employer the cost of the withholdings at purchase.
- When you exercise a non-statutory stock option (NSO), you're liable for ordinary income tax on the difference between the price you paid for the stock and the current fair market value. And yes, the taxable capital gain for NSOs is calculated by subtracting the FMV of the stock on the day you purchased your shares from the sale price. Because it appears that you held your NSOs for less than one year, the gain/loss is short-term gain/loss.
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