Stock options granted as part of an incentive stock option plan or an employee stock purchase plan are considered statutory stock options for tax purposes.
Employment Requirements
There are employment requirements that must be met in order for the option to be considered a statutory stock option:
You must be an employee of the company that grants the option, or an employee of a related company, at all times from the date the option is granted until three months before the option is exercised. For an incentive stock option plan, this period is extended to one year before the option is exercised, if you are disabled.
The option must be nontransferable, except upon death.
If you do not meet these employment requirements, the option will be treated as a nonstatutory stock option.
When To Report Income
When you receive a statutory stock option you do not have to report any amount as taxable income either when you receive the option or when you exercise it. You will have taxable income or a deductible loss when you sell the stock you purchased with the option. Your income or loss is the difference between the amount you paid for the stock (the option price) and the amount you receive when you sell it.
Capital Gain or Loss
If you meet the holding period requirements, this gain or loss on the sale would be reported on Schedule D, Capital Gains and Losses, in the year you sold the stock. But you may have to report ordinary income in either of the following cases:
You do not meet the holding period requirement; that is, you sell the stock within 1 year after its transfer to you or within 2 years from the date the option was granted, or
You meet the conditions for options granted at a discount.
In this case, your income would be reported on the wages and salaries line of your tax return for the year in which you sold the stock.