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Date:   30 Apr 2009
From:   Natalie

If an employee exercises non-qualified options and the FMV is less than the grant price on the exercise date, does the company need to report the loss on the employee's W-2?

Answer

Date:   6 May 2009

Hello Natalie,

No. Only income is reported.

The only reason I can think of for an employee to exercise an option like this is it's the only way to get the employer stock and a liquidity event (sale of the business or public offering) is expected in the near future when the stock price is expected to dramatically increase. Otherwise, it's crazy to exercise an "underwater" option.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.