Strike price

Your option grant sets the strike price, and tax rules call it the exercise price or the option price. Listed calls and puts use the same term for the price at which the holder can buy or sell the stock.

An ISO’s strike price must be at least the stock’s fair market value on the grant date. If you own more than 10% of the company’s voting power, it must be at least 110% of that value. An NSO priced below the stock’s fair market value on the grant date is generally deferred compensation under Section 409A. If the option fails 409A’s rules, the income can be taxed as it vests. An extra 20% tax plus interest is added, and you owe it yourself.

An option has a spread only when the stock is worth more than the strike price. That spread, called the bargain element, is the amount the tax rules measure at exercise. When the stock is worth less, the option is underwater and has no spread to tax. After an NSO exercise, your basis is the strike price plus the income taxed at exercise. Using the strike price alone taxes that income twice.