Something to readCompensation
Stock options
A short IRS page on when employee stock options get taxed, and why the type matters
Why it’s worth your time
The IRS's own topic page on stock options is the short, primary-source answer to a question that can cost real money: when does your equity count as income? It sorts options into two groups that are taxed on very different schedules, which tends to matter most in the weeks before you exercise.
When stock options get taxed
The essay · 3 min · Free
How to get it
Opens their site. We don’t copy it here; we’d rather they get the read.
- Read the topic page.
It's short. Find the section that matches your options: statutory, which covers incentive stock options and employee stock purchase plans, or nonstatutory. Notice the line about the alternative minimum tax and the forms your employer should send after you exercise or sell.
- Write down the type, dates and price from your grant.
Open your grant agreement or your company's equity portal. Note whether the options are incentive or nonstatutory, the grant date, the exercise price and the expiry date. Keep the note with the agreement itself.
Good moments for this: before you exercise any optionswhen a new equity grant arrivesin the weeks before you file taxes
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Making it work for you
Every workplace is different. Here’s what to think about before you start, and what might get in the way.
Things to think about
The IRS page covers US federal income tax only. States often have their own rules, and if you've lived or worked in more than one state or country while holding the options, things can get more tangled.
What might make this harder
Restricted stock units are taxed on a different schedule, and the IRS topic page doesn't cover them. Ask your equity team for the plan documents and look for a guide written about RSUs.
Questions people ask
What is IRS Topic 427 about?
It's the Internal Revenue Service's short summary of how employee stock options are taxed in the US. It splits options into statutory ones, the ISO and purchase-plan kinds, and nonstatutory ones, and says when each creates income.
When are nonstatutory stock options taxed?
Usually when you exercise them. For the common case, options with no readily determinable market value, you count the shares' value at exercise minus what you paid as income, and a later sale can bring a capital gain or loss.
Do incentive stock options trigger the alternative minimum tax?
They can. Exercising one generally adds nothing to regular income, but the IRS notes you may owe alternative minimum tax for that year.
How do I find out what kind of stock options I have?
Your grant agreement or equity portal usually says. If not, ask whoever runs the equity plan; the IRS points to Publication 525 for telling the types apart.
What it says, and how it holds up
Stock options can feel like a lottery ticket filed in a drawer, until the year you exercise them and the tax arrives. The IRS's topic page is a reference, a few hundred words that settle the timing question at the source. The kind of option you hold, more than the number, tends to decide when the tax shows up. Statutory options generally aren't counted as income when you receive or exercise them; you deal with the tax when you sell, often as a capital gain. Nonstatutory options usually create income at exercise, on the gap between what you pay and what the shares are worth that day.
When you're comparing two offers, the IRS page covers only how and when the tax arrives; it doesn't touch what the shares might be worth or how long you'd have to exercise after leaving, which your grant agreement or plan sets.
What the page does well is name the paperwork: Form 3921 after you exercise an incentive option, and Form 3922 after you first sell or transfer shares from a purchase plan. Knowing those forms should arrive gives you a way to check that your records and your employer's agree. For the rest it's dry and points elsewhere: it flags the alternative minimum tax without explaining it, mentions holding-period requirements without giving them, and sends you to Publication 525 and the Form 6251 instructions for the detail. This explains how things usually work; it isn't financial, tax or legal advice for your situation.
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Picked by Truest and described in our own words. The original belongs to its creator. Last updated October 9, 2026. We sell a career membership; where that’s relevant above, we say so.