The test assumes neither side is forced to trade and both know the relevant facts. Most equity pay is taxed on its FMV, minus anything you paid for it. RSU income is the shares’ FMV on the day they are delivered. For an NSO, the taxable spread is the FMV at exercise minus the exercise price. Form 3921 reports the FMV per share on the day you exercise an ISO. Form 3922 reports it on the grant date and the purchase date of ESPP shares.
The FMV of public stock comes from actual trades, such as the day’s closing price. Private company stock needs a reasonable valuation method. Under Section 409A, a qualified independent appraisal dated within 12 months is presumed reasonable for pricing options. Startups often call it a 409A valuation. Material information that arises after its date, such as a new patent, can make it unreasonable.
Vesting earns no discount. For stock you receive for work, FMV ignores any restriction that will lapse, including vesting. Only a restriction that will never lapse, such as a permanent resale price formula, is taken into account.
Sources
- 26 C.F.R. § 20.2031-1, Definition of gross estate; valuation of property
- 26 U.S.C. § 83, Property transferred in connection with performance of services
- 26 C.F.R. § 1.409A-1, Definitions and covered plans
- IRS, Instructions for Forms 3921 and 3922
Reviewed and updated September 2026. General information, not advice for your situation.