How is compensation from the exercise of nonstatutory stock options reported if not recognized at the grant date?

Compensation from the exercise of nonstatutory stock options that is not recognized at the grant date is reported based on the gain realized at the time of exercise. Specifically, the correct reporting involves showing the fair market value of the stock at the time of exercise, minus the exercise price of the option. This difference, often referred to as the "spread," represents the income that is subject to taxation and is reported on the employee's Form W-2 in box 12 with a "V" code.

This approach is consistent with IRS regulations concerning nonstatutory stock options. Since the option does not lead to immediate recognition of income at the grant date, it ensures that the employee is taxed based on the actual economic benefit received at the time of exercising the option.

The other options misinterpret the components involved in this calculation or the basis for determining taxable income, which is critical for accurate reporting and compliance with tax obligations.