If you are granted a statutory stock option under an employee stock purchase plan or an employee incentive stock option plan (ISO), you generally do not include any amount in your gross income as a result of the grant or exercise of your option. Treat income or loss from the sale of the stock as a capital gain or loss. However, if you do not meet the special holding periods tests, you may have ordinary income up to the amount of gain. Refer to Publication 525, Taxable and Non Taxable Income.

If you are granted a non-statutory stock option, the amount of income to include and the time to include it depends on whether the fair market value (FMV) of the option can be readily determined. For specific information and reporting requirements, refer to Publication 525.

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