Enrolled Agent Practice Exam 2025 - Free Enrolled Agent Practice Questions and Study Guide

Income from statutory stock options is reported when the stock is ultimately sold. This is primarily because statutory stock options, such as Incentive Stock Options (ISOs), provide favorable tax treatment under certain conditions. Specifically, the taxable event for ISOs occurs only when the stock obtained through the exercise of the option is sold.

At the point of exercise, there is typically no immediate tax consequence, as long as the stock is held for a certain period (usually one year after exercise and two years after the option grant). When the shares are sold, any difference between the sale price and the exercise price constitutes a capital gain or loss, which is then reported for tax purposes. This approach aligns the taxation with the actual realization of gain or loss from the investment, rather than at the earlier stages of option grant or exercise.

Additionally, the holding period plays a role as it affects whether the gain is treated as a long-term or short-term capital gain, further influencing tax liability at the time of the stock sale.