Nonqualified employee stock options are not ordinary income at vesting but rather ordinary income at exercise. With a cashless exercise, the stock is purchased and simultaneously sold. Employer would pick up the spread (difference between FMV at sale and exercise price) as ordinary income and also pick up the taxes withheld. Income and tax will be reflected on W-2 from employer. There should be no gain/loss on the transaction since the purchase/sale was done simultaneously so the basis should be adjusted to reflect $0 gain/loss on the tax return. The 1099 is often misleading and many end up double paying the tax because of this.
