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NSO Tax Calculator

Estimate the tax when you exercise Non-Qualified Stock Options — the ordinary income and FICA, the extra you may owe if 22% withholding fell short, your real cost basis, and capital gains when you sell.

Exercising an NSO is a taxable event: the spread between FMV and your strike is ordinary income, taxed like salary with FICA. Default withholding is often only 22%, so high earners owe more at filing — and your cost basis becomes the FMV, not the strike. This tool shows all of it.
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The market / 409A value per share on the day you exercise.
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Use your top federal bracket — e.g. 24%, 32%, 35% or 37%.
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Tick this if your wages already exceed the annual SS limit — the 6.2% no longer applies.
When you sell (optional)
Leave blank to estimate exercise tax only.
⚠ Likely still owed at filing
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Beyond what your employer already withheld.
Ordinary income at exercise
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Total tax at exercise
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Employer withheld (est.)
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After-tax value
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Your cost basis
— /share · — total
Your basis is the FMV at exercise — not the strike. When you sell, make sure your 1099-B / Form 8949 shows this, not the strike, or you pay income tax twice.
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How to use it

  1. Enter the options exercised, your strike price and the FMV at exercise.
  2. Enter your marginal federal rate and the withholding rate your employer uses (often 22%).
  3. Add an optional state rate, and tick the box if you are already over the Social Security cap.
  4. Optionally enter a sale price and holding period to see the capital gain when you sell.

How it’s estimated

When you exercise an NSO, the spread between the fair market value and your strike is ordinary income — taxed like salary, plus Social Security and Medicare. That FMV becomes your cost basis. When you later sell, only the change since exercise is a capital gain.

Estimate for U.S. taxpayers. Uses your stated marginal rate rather than computing brackets; ignores the 3.8% NIIT, the 0.9% additional Medicare surtax and deductions.

What happens when you exercise an NSO

A Non-Qualified Stock Option gives you the right to buy company stock at a fixed strike price. Nothing is taxed when the option is granted or as it vests. The taxable event is exercise: the moment you buy the shares, the difference between their fair market value and your strike — the bargain element — is treated as ordinary income. It is added to your W-2 and taxed exactly like salary, including Social Security and Medicare.

The 22% withholding gap

Your employer typically withholds federal tax on the bargain element at the 22% supplemental rate. If your real marginal rate is higher, that withholding falls short and the gap lands on you at filing. On a large exercise this can be a five-figure surprise in April. Plan for it by adjusting your withholding or making an estimated payment in the quarter you exercise.

The cost-basis trap

Here is the mistake that quietly costs option holders the most. When you exercise, the FMV becomes your cost basis, because you already paid income tax on the spread. But brokers frequently report only the strike price on the 1099-B. File that unchanged and the IRS taxes the entire gain over the strike as a capital gain — taxing the bargain element a second time. The fix is to adjust the basis to the exercise-date FMV on Form 8949. Keep your exercise confirmation and the W-2 that shows the bargain element.

Short-term vs long-term after exercise

Once you exercise and hold the shares, the capital-gains clock starts on the exercise date. Sell within a year and any gain over the FMV is short-term, taxed at your ordinary rate. Hold more than a year and it is long-term, taxed at the preferential 0/15/20% federal rate. Because the ordinary-income tax is already settled at exercise, only the appreciation since exercise is affected by the holding period.

A quick example

You exercise 1,000 NSOs at a $2 strike when the FMV is $12. Your bargain element is ($12 − $2) × 1,000 = $10,000 of ordinary income. At a 32% marginal rate your employer withholds only 22% ($2,200), but you actually owe about $3,200 in federal income tax — a roughly $1,000 gap before FICA and state. Your cost basis is $12 per share. Sell a year later at $20 and your gain is only ($20 − $12) × 1,000 = $8,000. But if the broker reported a $2 basis, you would be taxed on $18,000 — paying tax again on the $10,000 you already reported at exercise.

Final word

NSOs are straightforward once you see the two events clearly: ordinary income at exercise, capital gains at sale. Two habits protect you — plan for the withholding gap so April is not a shock, and always correct your cost basis to the exercise-date FMV so you are never taxed twice. When the numbers are large, confirm them with a qualified tax professional.

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Frequently asked questions

How are non-qualified stock options (NSOs) taxed?

At exercise, the bargain element — the fair market value minus your strike, times the number of options — is ordinary income, taxed exactly like wages and subject to FICA. When you later sell, any change from the exercise-date value is a capital gain. There is no tax at grant.

Is the 22% withholding on my NSO enough?

Often not. Employers usually withhold at the 22% supplemental rate on the bargain element. If your marginal bracket is 32%, 35% or 37%, you will owe the difference at filing — that is the "likely still owed" figure here.

What is my cost basis after exercising an NSO?

Your cost basis is the fair market value at exercise, because you already paid ordinary income tax on the spread. Brokers sometimes report only the strike price, which would tax you twice. Correct it on Form 8949 so you are taxed only on the gain since exercise.

Do NSOs owe Social Security and Medicare?

Yes. Unlike ISOs, the NSO bargain element is subject to FICA — 6.2% Social Security up to the annual wage cap and 1.45% Medicare, plus the 0.9% additional Medicare surtax for high earners.

NSO vs ISO — which is better?

ISOs can defer regular tax and qualify for long-term rates, but carry Alternative Minimum Tax risk. NSOs are simpler: ordinary income at exercise, then normal capital gains. NSOs have no AMT and no holding-period test for the ordinary-income piece. See our ISO calculator to compare.

When does my sale become long-term?

The holding period starts on the exercise date. Sell more than a year later for long-term capital-gains rates (0/15/20%); a year or less is short-term, taxed at your ordinary rate.

Methodology & sources

Calculations follow standard U.S. treatment of non-qualified stock option income and capital gains. References: IRS Publication 525, Form 8949 instructions and the Social Security Administration annual wage base. Tax year 2026. Last updated 2026-07.

⚠️ Educational estimate only — NOT tax advice. Your actual tax depends on your full income, filing status, state, residency and current law. Confirm with a qualified tax professional before acting.
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