Yes, they are subject to self-employment tax.
Once you exercise your non-qualified stock option, the difference between the stock price and the strike price is taxed as ordinary income.
This income is usually reported on your paycheck, but since you are not an employee, it was reported on a 1099.
The sale of the stock after an option is exercised is then reportable as capital gain or loss.
The FMV on the exercise date becomes the purchase price or cost basis of the shares for purposes of determining gain or loss.
If the shares are held for at least one year after exercise, the proceeds constitute long term capital gain or loss to the taxpayer.
If the shares are sold within one year or less from the exercise date, the proceeds constitute short term capital gain or loss to the taxpayer.
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