Updated October 9, 2026. Employee stock options are taxed in 2026 under the same two tracks.
Nonqualified options. Ordinary income at exercise, equal to the spread. Withholding applies. Capital gain or loss after that, measured from the exercise-day value.
Incentive stock options. No regular income tax at exercise if you hold the shares. The spread can be an alternative minimum tax preference in the year you exercise. Sell at least two years after grant and one year after exercise and the whole gain over the strike is long-term capital gain. Sell earlier and the spread at exercise, or at sale if lower, is ordinary income.
Federal ordinary brackets and the AMT exemption are inflation-adjusted and were affected by the 2025 tax law that made many Tax Cuts and Jobs Act individual provisions permanent. Use the IRS tables for the year you exercise. Do not use a bracket chart printed in 2023.
A same-day sale of either type produces ordinary income on the spread. It does not produce only capital gain.