are stock options taxed as capital gains? Practical guide

Taxation of Stock Options: Capital Gains vs Ordinary Income

As of January 15, 2026, according to IRS Topic No. 427 and major practitioner guides, many taxpayers ask: are stock options taxed as capital gains? This article answers that question in plain English and with actionable detail for U.S. federal tax purposes. You will learn how incentive stock options (ISOs), non‑qualified stock options (NSOs), employee stock purchase plans (ESPPs), restricted awards, and exchange‑traded options are taxed at grant, exercise, and sale — and when gains are ordinary income versus capital gains.

In the first 100 words we addressed the core search intent: are stock options taxed as capital gains. Read on for clear rules, examples, reporting steps, and practical planning considerations. If you hold options or trade options contracts, this guide will help you understand tax timing, forms you should expect to receive, and how holding periods change capital gains treatment.

Types of Stock Options and Related Equity Awards

Below are the common types of equity awards and option contracts encountered by employees and investors. The tax treatment — and whether gains are taxed as capital gains — depends on which type you hold.

Incentive Stock Options (ISOs)

• Brief description: ISOs are statutory, employee‑only options granted by an employer under a plan that meets IRS rules. They cannot be granted to nonemployees and are subject to limits (e.g., per‑person annual grant limits).
• Why they matter: ISOs may receive preferential tax treatment — potentially producing long‑term capital gains on the entire spread if strict holding periods are met. This is a common reason employees ask, "are stock options taxed as capital gains?" when they hold ISOs.

Non‑Qualified (Nonstatutory) Stock Options (NSOs / NQSOs)

• Brief description: NSOs can be granted to employees, contractors, directors, or others. They do not qualify for the special ISO tax regime.
• Tax consequence summary: NSOs typically generate ordinary income at exercise equal to the spread (FMV at exercise minus exercise price). After exercise, additional gain or loss on sale is capital in nature — which is why many people ask whether stock options are taxed as capital gains; with NSOs the capital gains discussion generally applies only to post‑exercise appreciation.

Employee Stock Purchase Plans (ESPPs)

• Brief description: ESPPs allow employees to buy company stock at a discount, sometimes through payroll deductions. A qualifying (tax‑favored) ESPP follows specific holding‑period rules under the Code.
• Tax consequence summary: A qualifying ESPP disposition can produce a split result — a portion taxed as ordinary income (if there is a discount) and the remainder as long‑term capital gain if holding periods are met. If the disposition is disqualifying, more of the gain is taxed as ordinary income.

Restricted Stock Awards / RSUs (contextual)

• Brief note: Restricted stock and restricted stock units (RSUs) are not options but often appear in the same compensation packages. They are generally taxed upon vesting/settlement as ordinary income, and subsequent sales generate capital gain or loss measured from the recognized ordinary income basis.

Exchange‑traded Options (calls and puts) — investor/trader context

• Brief distinction: Options traded on exchanges (calls and puts) are securities contracts between market participants. Tax rules for these are different from employee options: premiums, expirations, exercises, and closing transactions create capital gain or loss events governed by capital gains rules (short‑term or long‑term depending on holding period) and specific IRS guidance for options.

Taxable Events: Grant, Exercise, and Sale — General Principles

Many taxpayers ask when tax actually happens. The principal taxable events for option holders are grant, exercise, and sale (disposition) of the acquired shares.

At Grant

• General rule: Most stock options are not taxable at grant. The mere grant of an option typically creates no current tax — the taxpayer has a contract right but no recognized income.
• Exceptions: Certain transferable options, deeply discounted options, or nonstandard awards may create tax on grant under limited circumstances. These exceptions are uncommon for standard ISOs and NSOs.

At Exercise (difference by option type)

• NSOs: Exercise usually triggers ordinary income on the spread (FMV at exercise minus exercise price). That ordinary income is subject to payroll taxes and withholding for employees.
• ISOs: For regular tax purposes, a properly‑structured ISO exercise generally does not produce ordinary income immediately. However, the ISO bargain element (the spread) is an adjustment for the alternative minimum tax (AMT) and can produce AMT liability in the year of exercise.
• ESPPs: Tax at exercise depends on whether the plan is a qualifying ESPP; often ordinary income recognition is deferred until sale, with rules that allocate ordinary income and capital gain portions depending on holding periods.

At Sale/Disposition

• General: When the shares acquired from options are sold, the sale generally produces a capital gain or loss measured from the holder’s tax basis.
• Key nuance: For NSOs, because ordinary income was already recognized at exercise, the basis for capital gain purposes is typically the exercise price plus the amount recognized as ordinary income (the spread). For ISOs, a qualifying disposition yields capital gain (possibly long‑term) measured from the exercise price; a disqualifying disposition converts some or all gain to ordinary income.

Detailed Treatment — ISOs vs NSOs

This section focuses on the most common employer options and answers the question: are stock options taxed as capital gains for ISOs and NSOs?

ISO Tax Treatment

• Qualifying dispositions: If an ISO is held for at least two years from the grant date and at least one year from the exercise date, the sale is a qualifying disposition. In that case, the gain between the sale price and the exercise price is taxed as long‑term capital gain. Thus, yes — for qualifying ISO sales, stock options are taxed as capital gains.

• Disqualifying dispositions: If the holding‑period requirements are not met (for example you sell within a year of exercise), the sale is a disqualifying disposition. Part or all of the gain up to the spread at exercise is taxed as ordinary income; any additional gain beyond that may be capital gain.

• AMT: At exercise of an ISO, the spread is an AMT preference item that can create AMT liability even when no regular tax is due. Taxpayers exercising large ISO positions should run AMT projections and may owe tax in the year of exercise even though no regular tax ordinary income was reported.

• Forms: Employers issue Form 3921 to report ISO exercises (grant/exercise details) to employees and the IRS.

NSO Tax Treatment

• Ordinary income at exercise: For NSOs, the bargain element (FMV at exercise minus exercise price) is ordinary income in the year of exercise. This income appears on the employee’s W‑2 for employees and is subject to income tax withholding and payroll taxes.

• Capital gain on subsequent sale: Any gain or loss on a later sale is capital in nature. The holding period for capital gains begins on the date of exercise because that is when you acquire the shares and establish tax basis.

• Withholding & payroll taxes: Employers typically withhold on NSO income, and Social Security/Medicare taxes apply to the exercise income.

• Forms: NSO exercise income is reported on Form W‑2 for employees; sales are reported on Form 1099‑B from brokers.

ESPP (qualified) Taxation Summary

• Qualifying disposition: If you hold ESPP shares for at least two years after the offering date and at least one year after purchase, the discount you received may be treated partly as ordinary income (often the lesser of the actual gain or the plan discount applied to the fair market value) and the remainder as long‑term capital gain.

• Disqualifying disposition: If you sell sooner, more of the gain is treated as ordinary income, and fewer amounts qualify as capital gains.

• Form: Employers may issue Form 3922 to report ESPP share transfers; broker reports show sale proceeds.

Capital Gains Rules and Holding Periods

Understanding holding periods is crucial to answering "are stock options taxed as capital gains" because the capital gains rate depends on whether the gain is short‑term or long‑term.

Long‑term vs Short‑term Capital Gains

• Long‑term capital gains: For most assets, a gain is long‑term if the asset is held for more than one year. Long‑term rates are generally lower than ordinary income rates.
• Short‑term capital gains: If you hold an asset one year or less, the gain is short‑term and taxed at ordinary income rates.

Holding‑period timing for ISOs and NSOs

• ISOs: For ISO favorable capital gains, two tests apply — two years from grant and one year from exercise. Meeting both yields long‑term capital gain treatment on the sale of shares.
• NSOs: The holding period for capital gain purposes starts at exercise, so to get long‑term capital gain rates you must hold the shares more than one year after exercise.

Alternative Minimum Tax (AMT) and Special Considerations

AMT and ISOs

• The ISO bargain element (spread at exercise) is an AMT preference item and must be added back for AMT calculations in the year of exercise. Large ISO exercises can thrust taxpayers into AMT even though they have no regular taxable income from the ISO exercise. AMT calculations are complex — Form 6251 is used to compute AMT.

• Practical note: Taxpayers who exercise ISOs should model their AMT exposure and consider staggering exercises, using early exercises, or coordinating sales to manage AMT risk.

Employer Withholding and Payroll Taxes (NSOs)

• NSO exercise income is subject to payroll taxes and employer withholding for employees. Employers typically report the income on Form W‑2.

Tax Treatment of Disqualifying Dispositions

• Disqualifying dispositions of ISOs or ESPP shares reclassify some or all of the gain to ordinary wage income. This changes how much of the sale proceeds are treated as ordinary income vs capital gain and affects the basis for subsequent capital gain calculation.

Taxation of Exchange‑Traded Options and Investor Strategies

For investors and traders using exchange‑traded calls and puts, tax rules differ from employee option taxation. Here is a concise overview.

Taxation of Bought (Long) Options

• Premiums paid: The premium you pay to buy an option is capitalized. If you exercise a long option to buy stock, the premium becomes part of the stock’s basis. If you close the option position by selling it, the sale produces a capital gain or loss.

• Exercise vs sale: If you exercise a call and acquire the underlying shares, the option premium increases the basis of the shares, and the holding period for capital gains starts at exercise for the stock portion.

Taxation of Written (Short) Options

• Premiums received: Premiums you receive for writing (selling) options are generally treated as short‑term capital gain if the option expires worthless or is closed within a year. If assigned and you are required to sell or buy stock, special basis adjustments apply.

• Assignment: If you are assigned on a written option, the premium received adjusts the basis of the underlying stock depending on whether the assignment resulted in a sale or purchase of the underlying security.

Equity vs Non‑Equity Options and Special Rules

• Some options (non‑equity, broad‑based index options) have special tax rules under the Code (e.g., section 1256 contracts). Be aware that not all option contracts are taxed the same; consult a tax advisor or broker reporting guidance for complex positions.

Reporting Forms and Compliance

Accurate reporting and recordkeeping are essential to ensure gains are taxed correctly and to answer the question "are stock options taxed as capital gains" for your specific transactions.

Forms and Employer Reporting

• Form 3921: Used to report ISO exercises. Contains grant date, exercise date, exercise price, and fair market value at exercise.
• Form 3922: Used to report ESPP share transfers in qualifying plans.
• Form W‑2: NSO exercise ordinary income appears on W‑2 for employees.
• Form 1099‑B: Brokers report proceeds from sales of stock (including sales of shares acquired via options) on Form 1099‑B.
• Form 6251: For taxpayers who may be subject to AMT; used to compute AMT and track preference items like ISO exercises.

Basis and Recordkeeping

• Track: grant dates, grant prices, exercise dates, exercise prices, FMV at exercise, sale dates, sale prices, withholding, and broker statements.
• Why: Proper basis calculations and holding‑period tracking determine whether gains are ordinary income or capital gains and whether gains qualify for long‑term capital gain treatment.

Examples and Worked Scenarios

Worked examples help make the rules concrete and show when stock options are taxed as capital gains.

ISO qualifying disposition example

• Scenario: Grant date = Jan 1, 2020; exercise date = Feb 1, 2021; exercise price = $10; sale date = Mar 1, 2022; sale price = $60.
• Qualification: The sale occurs more than two years after grant and more than one year after exercise — a qualifying disposition.
• Tax result: The entire gain ($60 − $10 = $50 per share) is taxed as long‑term capital gain. For regular tax purposes, no ordinary income is reported at exercise (but the spread may have been an AMT adjustment in 2021).

NSO exercise then sale example

• Scenario: You receive NSOs, exercise on Jan 1, 2022 when FMV = $30 and exercise price = $10; you later sell on Apr 1, 2022 at $50.
• Tax result at exercise: Ordinary income of $20 per share ($30 − $10) in 2022, reported on W‑2 and subject to payroll taxes.
• Tax result at sale: Capital gain measured from basis. Basis = exercise price ($10) + ordinary income recognized ($20) = $30. Sale at $50 produces $20 per share capital gain. Because sale occurs less than one year after exercise, that gain is short‑term and taxed at ordinary rates.

Exchange‑traded call exercised vs expired example

• Exercise example: You buy a call for $5, exercise and pay $100 strike to buy one share when FMV = $110. Your basis = $100 + $5 premium = $105. If you later sell the stock, capital gain/loss is measured from $105.
• Expiration example: If the call expires worthless, your loss is the $5 premium and is treated as a capital loss on the option trade.

Tax‑Planning Considerations

Practical planning can materially affect whether gains from options become capital gains or ordinary income, and whether AMT arises.

When to Exercise (tax and cashflow tradeoffs)

• ISOs: Exercising early and satisfying holding periods can convert potential ordinary income into long‑term capital gain on sale, but exercising large ISO positions can cause AMT exposure.
• NSOs: Since exercise triggers ordinary income and withholding, exercising smaller amounts or coordinating with liquidity events can help manage tax withholding and cashflow.
• Considerations: Expected stock price appreciation, ability to pay exercise price and taxes, diversification needs, and lock‑up restrictions all matter.

Cashless Exercises and Sell‑to‑Cover

• Cashless exercise: Many brokers offer cashless exercise where shares are sold immediately to cover exercise price and taxes. This often converts the transaction into an exercise plus sale in the same tax year — practical but may limit the ability to obtain long‑term capital gain treatment because the sale may occur instantly.
• Tax effect: A cashless exercise that results in immediate sale typically produces the same tax result as exercising and simultaneously selling — ordinary income for NSOs on the spread and capital gain/loss on any additional proceeds.

Working with Tax Professionals

• Complexities like AMT, large ISO exercises, cross‑border tax issues, or trading strategies involving many option positions warrant professional help. Work with a CPA or tax attorney for personalized planning.

Common Questions / FAQs

“Are stock options taxed as capital gains?” — short answer

Short answer: It depends. For ISOs, qualifying dispositions produce capital gains (often long‑term) whereas disqualifying dispositions produce ordinary income. For NSOs, exercise creates ordinary income and only post‑exercise appreciation is capital gain or loss. For exchange‑traded options, gains and losses are generally capital in nature depending on holding period and contract type. In plain terms: are stock options taxed as capital gains? Sometimes — and the timing and type of option determine the outcome.

(Here the exact phrase appears to directly answer common search intent: are stock options taxed as capital gains.)

“Do I owe tax when granted options?”

Usually not. Most option grants are not taxable at the grant date. Tax typically arises at exercise (for NSOs and possibly AMT for ISOs) or at sale. Exceptions can exist for nonstandard or transferable options.

“What paperwork will I receive?”

Expect Form 3921 for ISOs, Form 3922 for qualifying ESPP transfers, W‑2 reporting for NSO exercise income (employees), 1099‑B from brokers for stock sales, and possibly Form 6251 if AMT applies. Keep grant letters, brokerage statements, and employer notices for your records.

Legal and Jurisdictional Notes

This article summarizes U.S. federal tax treatment (primarily IRS guidance). State tax treatment and international rules vary. For employees who move between states or countries, cross‑border tax rules can change timing and character of income. Consult a local tax professional for non‑U.S. or multi‑state situations.

References and Further Reading

Sources used in preparing this guide include authoritative IRS guidance and practitioner resources: IRS Topic No. 427 (Stock Options), Form 3921 and Form 3922 instructions, IRS Publication notes on capital gains, Carta guidance on ISO vs NSO taxation, Jackson Hewitt reporting guidance, Charles Schwab summaries for option traders, Investopedia option taxation articles, Morgan Stanley NQSO basics, Bloomberg Tax primers, and educational pieces from Bankrate and NerdWallet. These sources explain when option gains are ordinary income vs capital gains and the interaction with AMT.

As of January 15, 2026, according to IRS Topic No. 427 and Carta, the rules summarized above reflect current U.S. federal guidance and widely followed practitioner interpretations.

Examples of Practical Next Steps

• If you hold ISOs and are considering exercise: model AMT impact for the year of exercise; consider spreading exercises across years when feasible.
• If you hold NSOs: be prepared for ordinary income withholding at exercise; track basis carefully so later capital gains are computed correctly.
• If you trade exchange‑traded options: keep detailed records of premiums, assignment dates, and closing trades; consult broker statements.
• For secure storage and management of digital and security‑related account credentials, consider Bitget Wallet for storing keys and connecting to platforms. For trading option‑related crypto derivatives or tokenized equivalents, consider Bitget as your trading platform.

Further explore Bitget features for secure asset management and trading tools that help track transactions and records relevant to reporting and tax filing.

More Practical Examples

• Example A (ISO + AMT): You exercise ISOs with a small exercise price and large current FMV. For regular tax you report no ordinary income at exercise, but the ISO spread inflates AMT income. If AMT is owed, you may get credit in later years.
• Example B (NSO sold after 18 months): You exercise NSOs, report ordinary income at exercise, and later hold more than one year before sale. The post‑exercise gain beyond the exercise‑time FMV is taxed as long‑term capital gain.

Final Notes and Calls to Action

If you searched "are stock options taxed as capital gains" to determine how taxes will apply to a specific award, this article has laid out the core distinctions: ISOs can be capital gains on qualifying sales; NSOs create ordinary income at exercise and capital gain/loss on later sale; traded options generally create capital events when closed or exercised.

For personalized tax planning, especially when potential AMT or significant ordinary income is at stake, consult a qualified tax professional. Keep careful records of grant dates, exercise dates, exercise prices, fair market values, and sale documentation.

Want tools to track options and stock sales, or a secure wallet for related digital assets? Explore Bitget Wallet for key management and Bitget for trading and account reporting features that can help you centralize records for tax reporting and compliance.

Thank you for reading. If you need a checklist or a printable summary of the taxable events for ISOs, NSOs, ESPPs, and traded options, request a tax‑report checklist to help you prepare for tax season.

Sources: IRS Topic No. 427; Form 3921 and Form 3922 instructions; Carta — “How Stock Options Are Taxed: ISO vs NSO”; Jackson Hewitt — “How Stock Options Are Taxed and Reported”; Charles Schwab — “How Are Options Taxed?”; Investopedia — “Tax Rules for Call and Put Options”; Morgan Stanley NQSO Basics; Bloomberg Tax; Bankrate; NerdWallet. As of January 15, 2026, according to IRS Topic No. 427 and Carta, the guidance summarized is current.