Code V in Box 12 of your W-2 is the dollar amount of ordinary income you picked up when you exercised non-statutory stock options during the year. It’s the spread between what you paid for the shares and what they were worth on the exercise date, and your employer has already added that amount into the wages shown in Box 1. You don’t report it again on your return. The real work comes later, when you sell the shares.
What Code V Reports
When you exercise a non-statutory stock option (NSO), you buy company stock at a preset exercise price that’s lower than the stock’s current market value. The difference is your spread, and the IRS treats it as ordinary compensation, no different from salary. Your employer calculates the spread on the exercise date and reports it in Box 12 with the letter V next to it.1Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026) – Section: Box 12 Codes
The legal basis is Section 83 of the Internal Revenue Code, which says that when you receive property for performing services, the excess of the property’s fair market value over what you paid for it counts as gross income.2Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection With Performance of Services For NSOs, that taxable moment is the exercise date, because that’s when you actually receive stock with a determinable value.
A quick example. Your options have a $10 exercise price. On the day you exercise, the stock trades at $50. The spread is $40 a share. Exercise 500 options and your Code V amount is $20,000.
It’s Already in Your Box 1 Wages
The single most common mistake with Code V is treating it as extra income on top of Box 1. It isn’t. If Box 1 shows $120,000 and Code V shows $20,000, your taxable wages are $120,000, not $140,000. Box 12 is an informational breakout of what’s already inside Box 1.
Your employer is required to include the Code V amount in three other places on the W-2:1Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026) – Section: Box 12 Codes
- Box 1, wages, tips, and other compensation.
- Box 3, Social Security wages, up to the wage base of $184,500 for 2026. If your other wages already exceed that cap, the NSO income won’t appear here.3Social Security Administration. Contribution and Benefit Base
- Box 5, Medicare wages. There’s no cap for Medicare, so the full spread is included regardless of income.
On your Form 1040, the Code V amount flows through automatically as part of your Box 1 wages on Line 1. You don’t list it separately, and there’s no special form to file for the exercise itself.
How Tax Was Withheld, and Why You May Still Owe
The income from an NSO exercise is treated as supplemental wages for withholding. That usually means federal income tax is withheld at the flat supplemental rate of 22%. If your total supplemental wages for the year top $1 million, the rate on the excess is 37%.4Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
Your employer also withholds 6.2% for Social Security (up to the wage base) and 1.45% for Medicare. Those withheld amounts show up in Boxes 2, 4, and 6.
Here’s the catch. The flat 22% rate may not match your actual marginal bracket. If you land in the 32% or 35% bracket, the withholding covers only part of what you owe, and you can be surprised at filing time. Making an estimated tax payment in the quarter you exercised can head off an underpayment penalty.
Large exercises can also drag two other taxes into the picture. The Additional Medicare Tax of 0.9% applies once your total wages pass $200,000 for a single filer or $250,000 for married filing jointly.5Internal Revenue Service. Questions and Answers for the Additional Medicare Tax Employers start withholding the extra 0.9% once your wages pass $200,000 regardless of filing status, so a married couple filing jointly who are each under $200,000 may need to reconcile at filing. And when you eventually sell the shares, any capital gain counts toward the 3.8% Net Investment Income Tax if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (joint).6Internal Revenue Service. Net Investment Income Tax
The Cost Basis Trap When You Sell the Shares
This is where most taxpayers get burned, and it’s the reason Code V deserves close attention even though it looks like a passive informational box.
When you sell shares acquired through an NSO exercise, you report the sale on Form 8949 and the totals carry to Schedule D.7Internal Revenue Service. Instructions for Form 8949 (2025) Your correct cost basis is the exercise price you paid plus the ordinary income you already recognized (the Code V amount). In the earlier example, you paid $10 a share and recognized $40 a share as ordinary income, so your basis is $50 a share, not $10.
But for options granted after 2013, the IRS requires brokerages to report the basis on Form 1099-B without including the income you recognized at exercise.8Internal Revenue Service. 2025 Instructions for Form 8949 So your 1099-B will likely show a basis of $10. If you don’t correct that, you’ll pay tax on the $40 spread twice: once as ordinary income at exercise (already inside Box 1) and again as capital gain when you sell.
To fix it on Form 8949, enter the incorrect basis from the 1099-B in column (e), enter adjustment code B in column (f), and put the correction amount as a negative in column (g). In the running example, that’s $10 in column (e), code B in column (f), and negative $40 in column (g), which lands you on the correct gain.7Internal Revenue Service. Instructions for Form 8949 (2025)
Most tax software walks you through this adjustment if you tell it the shares came from an NSO exercise. If you’re filing manually or your preparer doesn’t ask the right question, the double-tax error slips through easily.
Holding Period After Exercise
Any gain or loss beyond the spread you already recognized as ordinary income is a capital gain or loss. The rate depends on how long you hold the shares after exercising.
- One year or less after exercise: short-term, taxed at your regular income tax rates.9Internal Revenue Service. Topic No. 409, Capital Gains and Losses
- More than one year after exercise: long-term, taxed at 0%, 15%, or 20% depending on your taxable income and filing status.9Internal Revenue Service. Topic No. 409, Capital Gains and Losses
If the stock drops after you exercise, you can end up with a capital loss even though you already paid ordinary income tax on the spread. The loss offsets other capital gains and up to $3,000 of ordinary income a year, but it doesn’t undo the ordinary income tax you already paid at exercise. Exercising and selling on the same day (a same-day sale) sidesteps that price risk, though any gain will be short-term.
Not the Same as Incentive Stock Options
If Code V appears on your W-2, you exercised NSOs, not incentive stock options (ISOs). ISOs are reported differently and generally don’t produce a regular income tax event at exercise, though they can trigger Alternative Minimum Tax. Don’t apply Code V logic to ISO shares, and don’t expect ISO exercises to show up in Box 12 with a V.
If Code V Is Missing or Looks Wrong
Reporting errors happen, especially at companies running their first significant round of option exercises. If the Code V amount doesn’t match your brokerage records of the exercise, or if it’s missing entirely, start with your employer’s payroll or HR department and ask for a corrected W-2.
The correction comes on Form W-2c. If you’ve already filed for the year, you’ll need to file Form 1040-X and attach Copy B of the W-2c.10Internal Revenue Service. Form W-2c (Rev. January 2026) Corrected Wage and Tax Statement If you haven’t filed yet, attach both the original W-2 and the corrected W-2c to your return.