NSO tax calculator 2026: exercise, basis, capital gain
Non-qualified options split into ordinary income at exercise and capital gain at sale. This tool shows both, plus the withholding gap.
Updated November 4, 2026 Sources and methodology
Federal income tax only. The exercise is also subject to Social Security and Medicare on the spread: 6.2% up to the wage base, 1.45%, plus 0.9% above $200,000 single or $250,000 joint.
The two events
Exercise. Spread = (share price at exercise − strike) × options. That amount is ordinary wage income with no AMT exposure and no deferral. It is withheld at the supplemental rate of 22%, which is typically below the marginal rate of the employees who receive options.
Sale. Basis is the exercise-date fair market value. Selling above it creates a capital gain, long-term if you held more than a year. Selling below it creates a capital loss. You can lose money on the stock and still owe tax on the exercise, which is why an early-exercise, no-sale strategy deserves a cash buffer.
Worked example
5,000 options at a $10 strike, exercised at $50 and sold at $70, married filing jointly with $200,000 of other income. Ordinary income is $200,000 and the capital gain is $100,000. The exercise moves taxable income from $167,800 to $367,800, crossing from the 22% bracket into the 24%, and adds $47,128 of federal tax. Withholding at the flat 22% is $44,000, so $3,128 is still owed in April. Push the other income to $500,000 and the same exercise costs 34.3% instead, because it crosses into the 35% bracket.
Where NSOs beat ISOs
| Situation | Better instrument |
|---|---|
| Planning to sell quickly | NSO: no AMT, no disqualifying disposition |
| Low income year, long hold planned | ISO: capital gain treatment |
| Company illiquid, price volatile | NSO: tax tied to a real spread you can fund |
| High AMT exposure already | NSO, or ISOs only up to the crossover |
Frequently asked
How is NSO income taxed at exercise?
The difference between the share price and your strike on the exercise date is ordinary compensation income, reported on your W-2 and subject to income tax plus Social Security and Medicare. Your employer withholds a flat 22% federally, or 37% on supplemental wages above $1 million in the year.
What is my cost basis after exercising NSOs?
The fair market value on the exercise date, not the strike price. If you sell later, only the change from that value is a capital gain or loss, and the holding period starts at exercise.
Are NSOs ever better than ISOs?
Often yes. NSOs produce a known, certain tax with cash in hand and no AMT exposure if the stock later collapses, while ISOs defer tax but can create AMT on unrealized gains. For employees who cannot hold for two years, or who exercise near a liquidity event, NSOs are frequently the cheaper path.
Sources. Supplemental withholding: IRS Publication 15 (2026). Brackets, standard deduction and capital-gain thresholds: IRS Rev. Proc. 2025-32. NSO treatment: Code sections 83 and 421. Estimates exclude payroll taxes, the 3.8% net investment income tax and state rules beyond the flat rate you enter.