If you see Code V in W-2 Box 14, your employer is showing you how much of your Box 1 wages came from exercising nonstatutory stock options (NSOs). The number is informational. It’s already included in the taxable wages reported in Box 1, so you don’t add it again anywhere on your Form 1040. The official reporting slot for this figure is Box 12 with the code letter V; Box 14 is just a convenience copy your employer added so you can see the stock-option piece of your paycheck broken out.
What the Code V Number Actually Measures
NSOs let you buy company stock at a fixed exercise price. When you exercise, the difference between the stock’s fair market value that day and the price you paid is called the spread, and federal law treats it as ordinary compensation in the year you exercise. Under 26 U.S.C. §83, property received for services is included in gross income to the extent its value exceeds what you paid for it.1Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services
A quick example. Your options have a $10 exercise price, and the stock is worth $25 the day you exercise. The $15 per-share spread is ordinary income, taxed at your regular rates rather than capital gains rates. Your employer adds that spread to your wages, withholds on it, and reports the total as Code V.2Internal Revenue Service. Topic No. 427, Stock Options
Where Code V Is Officially Reported
The IRS requires employers to report the NSO spread in Box 12 using the letter V. The W-2 instructions define Code V as “income from the exercise of nonstatutory stock option(s)” and tell employers to show the spread between fair market value and the exercise price.3Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026) – Section: Box 12 Codes That same dollar amount is also rolled into:
- Box 1, your total taxable wages;
- Box 3, Social Security wages, up to the 2026 wage base of $184,500; and4Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
- Box 5, Medicare wages, with no cap.5Social Security Administration. What Is the Current Maximum Amount of Taxable Earnings for Social Security
The Box 12 entry exists so the IRS can confirm your employer withheld FICA correctly on the option income and so you have a record of the spread for later cost-basis work.
Why It Also Shows Up in Box 14
Box 14 is a catch-all. The IRS instructions say employers “may use this box for any other information that you want to give to your employee” and require each entry to be labeled.6Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026) – Section: Box 14a Other Employers use it for things like union dues, disability insurance, and health premiums. When yours puts “NSO Income,” “Stock Option Income,” or “Code V” in Box 14, it’s giving you a transparent breakdown of what’s inside your Box 1 total. Some states also key off Box 14 entries for their own returns, which is another reason employers include the label.
The Box 14 amount should match the Box 12 Code V amount exactly. If it does, no separate action is needed on your federal return.
You Don’t Add This to Your Return
The most important thing to understand about Code V, whether you see it in Box 12 or Box 14: it isn’t additional income. Box 1 already contains it. You report Box 1 on your Form 1040, and you’re done with the wages side of the transaction. Entering the Code V figure a second time would double-count the income.
Your Withholding May Not Cover the Bill
Employers treat the NSO spread as supplemental wages. For 2026, the federal flat rate on supplemental wages is 22%, rising to 37% on the portion of any employee’s supplemental wages above $1 million for the year.7Internal Revenue Service. Publication 15 (2026), (Circular E), Employers Tax Guide Social Security tax of 6.2% applies to the spread up to the wage base, and Medicare tax of 1.45% applies to all of it.
If you’re in the 32% or 35% bracket, that flat 22% withholding won’t be enough, and the shortfall shows up when you file. A large exercise can also trigger estimated tax penalties if you don’t make a quarterly payment to close the gap. Worth checking before you exercise, not in April.
Where Code V Matters Most: Your Cost Basis
The expensive mistake tied to Code V happens after you sell the shares. Your broker issues a Form 1099-B for the sale, and the cost basis it reports often reflects only what you paid to exercise, not the higher basis that includes the spread you already paid tax on. Report the sale using that unadjusted basis and you pay tax on the spread twice.
Your real basis is the exercise price plus the spread reported as Code V, which equals the fair market value on the day you exercised. In the earlier example, you paid $10 and the spread was $15, so your basis is $25 per share. The IRS instructions for Form 8949 spell this out: for compensatory options granted after 2013, the basis on your 1099-B “won’t reflect any amount you included in income upon grant or exercise of the option,” and you’re expected to increase your basis by that amount.8Internal Revenue Service. 2025 Instructions for Form 8949
You fix it on Form 8949. If the basis on your 1099-B was reported to the IRS but is understated, enter code B in column (f) and put the basis adjustment in column (g). The adjustment per share equals the Code V amount divided by the number of shares exercised. The corrected gain or loss flows to Schedule D.9Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets Many brokerages provide a supplemental statement alongside the 1099-B showing the adjusted basis; use it to double-check your figures.
The holding period for capital gains treatment starts on the exercise date. Sell more than a year after exercising and any further appreciation is a long-term gain. Sell within a year and it’s short-term, taxed at ordinary rates. Either way, the gain is measured from your adjusted basis, not from the original exercise price.
If the Numbers Don’t Match
If your Box 12 Code V doesn’t match your brokerage’s exercise records, or if Box 12 and Box 14 disagree, start with your employer’s payroll department. Typical causes are the wrong fair market value date, a miscount of shares, or a late-year exercise that got dropped. Your employer can issue a corrected W-2 on Form W-2c.10Internal Revenue Service. About Form W-2c, Corrected Wage and Tax Statements If they won’t fix it, you can ask the IRS to contact them, and you can file using the figures you believe are correct with an explanation attached.
One Thing Code V Doesn’t Cover
If your options are incentive stock options (ISOs) rather than NSOs, they don’t produce a Code V entry. ISOs are defined under 26 U.S.C. §422 and, when their holding-period rules are met, aren’t taxed as ordinary income at exercise at all (though the spread can factor into the Alternative Minimum Tax).11Office of the Law Revision Counsel. 26 USC 422 – Incentive Stock Options Seeing Code V on your W-2 tells you the options in question are nonstatutory, and the ordinary-income treatment already applies.