Equity compensation
How non-qualified stock options are taxed in 2026
A non-qualified stock option (NSO, also called an NQSO) is the most common form of stock option outside of early-stage startups. When you exercise, the spread — market value minus what you paid — is treated exactly like a cash bonus: it lands in Box 1 of your W-2 as ordinary income and is taxed at your regular marginal rate, up to 37% federal for 2026.
What gets withheld at exercise
Because the spread is supplemental wages, your employer withholds federal income tax at the flat 22% supplemental rate (or 37% on amounts over $1 million in a year), plus Medicare at 1.45% and Social Security if you are under the $184,500 wage base. High earners add the 0.9% Additional Medicare Tax once wages cross $200,000 (single) or $250,000 (married). The 22% withholding is often less than your true marginal rate, leaving a balance due in April.
After exercise: a new capital-gains clock starts
Once you exercise, your cost basis becomes the market value on the exercise date (strike price plus the spread you were taxed on). Any further gain or loss when you sell is a capital gain — short-term if you sell within a year, long-term if you hold longer. Model that second tax with the capital gains tax calculator. To see your true marginal bracket, use the marginal tax rate calculator.
NSOs are simpler but less tax-friendly than incentive stock options, which avoid ordinary tax at exercise — compare with the ISO AMT calculator.
Questions
NSO Stock Option Tax Calculator 2026 FAQ
How are NSOs taxed when I exercise?
The spread between the market value and your strike price, multiplied by the shares exercised, is ordinary compensation income. It is reported in Box 1 of your W-2 and taxed at your regular marginal rate, plus Medicare and (if under the wage base) Social Security. This happens at exercise whether or not you sell the shares.
What is the withholding rate on NSO exercises?
Employers withhold federal income tax on the spread at the 22% supplemental wage rate (37% on amounts over $1 million per year), plus 1.45% Medicare and the 0.9% Additional Medicare Tax above $200,000/$250,000 of wages. Because 22% is often below your real marginal rate, you may owe more when you file.
Do I pay tax again when I sell the shares?
Yes, but only on additional gain. After exercise your cost basis is the market value you were already taxed on. Selling above that creates a capital gain — short-term (ordinary rates) if held a year or less, long-term (0/15/20%) if held longer. Selling at or below basis produces no further ordinary tax.
Are NSOs better or worse than ISOs?
NSOs are simpler and have no AMT, but you pay ordinary income tax immediately on the full spread at exercise. ISOs defer regular tax and can qualify for long-term capital gains, but the spread is an AMT preference item. The best choice depends on your income, holding plans and cash to pay tax.
- Sources: IRS Publication 525 (Taxable and Nontaxable Income) · IRS Topic No. 427 (Stock Options) · IRS Rev. Proc. 2025-32 (2026 brackets) · SSA 2026 wage base $184,500.
- 🔄 Last updated June 27, 2026 · Tax year 2026
Disclaimer: Educational estimate only — not tax or financial advice; the operator is not a CPA or attorney. State tax, exact withholding and Social Security caps vary. Confirm with a tax professional before exercising.
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