You Make the Call - Oct. 29, 2026

Question: In 2026, Jordan exercised nonqualified stock options (NQSOs) that had no readily determinable fair market value when granted. The shares received were substantially vested at exercise, and the stock was worth more than the exercise price. Jordan kept all the shares and did not sell any stock during the year. Does Jordan still have taxable income for 2026?

Answer: Yes. Jordan has taxable compensation income in 2026 even though no shares were sold.

An NQSO gives Jordan the right to buy company stock at a fixed price set by the employer. When Jordan uses that right to buy the shares, Jordan exercises the option. If the stock is worth more on the exercise date than the price Jordan pays, the difference is called the bargain element and is treated as compensation income.

For example, if Jordan buys stock for $50 per share when it is worth $80 per share, the $30 difference is ordinary taxable compensation income for each share purchased.

The bargain element is reported on Form W-2, Wage and Tax Statement, in Boxes 1, 3 (up to the Social Security wage base) and 5, with Code V in Box 12. It also increases Jordan’s basis in the shares.

Takeaway: Exercising an NQSO can create taxable compensation even when the employee keeps the stock and does not sell it.