How to Report Nonqualified Stock on a Tax Return

How to Report Nonqualified Stock on a Tax Return. Stock you acquire with nonqualified stock options is treated like employee compensation, as long as the company stock is traded on a market exchange. Your income is the market value of the stock on the acquisition date minus your cost of exercising the purchase option. This amount is included with your wages on your annual Internal Revenue Service Form W-2. The total is reported as wage compensation on your tax return. You only report the stock acquired with the nonqualified options when you sell it. You have a capital gain or loss consisting of the difference between the sales proceeds and your "basis" in the investment. The basis is your cost to buy the stock plus the amount included as compensation in the year you exercised the option.

Step 1

Record a description of the sold stock on Schedule D in Column "A" of either Line 1 or Line 8. Line 8 is applicable if you sold the stock more than one year after purchase. Use Line 1 if selling the stock one year or less after purchase.

Step 2

Report the date you exercised the purchase option in Column "B."

Step 3

Enter the date you sold the stock in Column "C."

Step 4

Place the sale proceeds in Column "D."

Step 5

State the market value of the stock on the option exercise date in Column "E." This is your basis, consisting of the amount you paid for the stock plus the amount added to your W-2 and reported as compensation income.

Step 6

Subtract Column "E" from Column "D" and enter the result in Column "F."


  • Publication 525: Taxable and Nontaxable Income
  • Publication 550: Investment Incomes and Expenses
  • Schedule D: Capital Gains and Losses