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It depends; sometimes you have to make adjustments to the basis.  Exercising options triggers a tax bill and how much tax you pay when you sell the stock depends on when you sell it.   You pay tax on the difference between the stock price offered in the option and the stock's fair market value.  The compensation element is basically the amount of discount you get when you buy the stock at the option exercise price instead of at the current market price.  You calculate the compensation element by subtracting the exercise price from the market value.  

• The market value of the stock is the stock price on the day you exercise your options to buy the stock. You can use the average of the high and low prices that the stock trades for on that day.
• The exercise price is the amount that you can buy the stock for according to your option agreement.

Employers must report the income from a 2022 exercise of Non-qualified Stock Options in Box 12 of the 2022 Form W-2 using the code “V.”   The compensation element is already included in Boxes 1, 3 (if applicable), and 5, but is also reported separately in Box 12 to clearly indicate the amount of compensation arising from a nonqualified stock option exercise.

How you report your stock option transactions depends on the type of transaction.  Usually, taxable Non-qualified Stock Option (NQSO) transactions fall into four possible categories:

1. You exercise your option to purchase the shares and you hold onto the shares.
2. You exercise your option to purchase the shares, and then you sell the shares the same day.
3. You exercise the option to purchase the shares, then you sell them within a year or less after the day you purchased them.
4. You exercise the option to purchase the shares, then you sell them more than a year after the day you purchased them.

Each of these four scenarios has its own tax issues as the following four tax examples show, linked here.   Use this guide to determine if you need to add compensation to Form 1040 or adjust your basis on 1099-B.

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