Updated October 24, 2026. Quick answer: Tax Topic 427 is the IRS page on stock options received as payment for services. It splits them into statutory options (employee stock purchase plan or incentive stock option) and nonstatutory options. Statutory options generally add nothing to gross income at grant or exercise, though an ISO can trigger alternative minimum tax in the year of exercise.
Quick reference
| Item | What the IRS topic says |
|---|---|
| Statutory options | “Options granted under an employee stock purchase plan or an incentive stock option (ISO) plan are statutory stock options.” |
| Nonstatutory options | “Stock options that are granted neither under an employee stock purchase plan nor an ISO plan are nonstatutory stock options.” |
| Statutory grant or exercise | “If your employer grants you a statutory stock option, you generally don’t include any amount in your gross income when you receive or exercise the option.” |
| Form after an ISO exercise | “After exercising an ISO, you should receive from your employer a Form 3921, Exercise of an Incentive Stock Option Under Section 422(b).” |
| Nonstatutory without a readily determinable value | “For nonstatutory options without a readily determinable fair market value, there’s no taxable event when the option is granted but you must include in income the fair market value of the stock received on exercise, less the amount paid, when you exercise the option.” |
Two kinds of options
The topic starts with when income can arise. It says “If you receive an option to buy stock as payment for your services, you may have income when you receive the option, when you exercise the option, or when you dispose of the option or stock received when you exercise the option.” It then separates the options into statutory and nonstatutory. Which one you hold decides the rest, and the topic says “Refer to Publication 525, Taxable and Nontaxable Income for assistance in determining whether you’ve been granted a statutory or a nonstatutory stock option.”
Statutory stock options
For statutory options the topic says “If your employer grants you a statutory stock option, you generally don’t include any amount in your gross income when you receive or exercise the option.” There is a catch for one type: “However, you may be subject to alternative minimum tax in the year you exercise an ISO.” Our pages on Form 6251 line 2i and the ISO AMT bargain element cover that.
Income arises later. The topic says “You have taxable income or deductible loss when you sell the stock you bought by exercising the option.” It adds “You generally treat this amount as a capital gain or loss.” The exception is stated this way: “However, if you don’t meet special holding period requirements, you’ll have to treat income from the sale as ordinary income.”
Each plan type has its own form. For an ISO, “After exercising an ISO, you should receive from your employer a Form 3921, Exercise of an Incentive Stock Option Under Section 422(b).” For an employee stock purchase plan, “After your first transfer or sale of stock acquired by exercising an option granted under an employee stock purchase plan, you should receive from your employer a Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan under Section 423(c).” See ESPP qualifying disposition holding period and ESPP disqualifying dispositions.
Nonstatutory stock options
For nonstatutory options the topic says “If your employer grants you a nonstatutory stock option, the amount of income to include and the time to include it depends on whether the fair market value of the option can be readily determined.” On the first case it says “If an option is actively traded on an established market, you can readily determine the fair market value of the option.”
The second case is the common one according to the topic: “Most nonstatutory options don’t have a readily determinable fair market value.” For those, the income is included at exercise, and a later sale produces a gain or loss. For specific information and reporting requirements the topic sends readers to Publication 525. Our page on sell to cover with stock options is related.
Where this comes from
This page describes the IRS page titled Topic no. 427, Stock options, as served on irs.gov on October 24, 2026. The IRS page shows that it was last reviewed or updated on 24 Sep 2026. The IRS can change a topic after we read it, and the IRS page controls. General information, not tax or legal advice.
Common mistakes
- Treating all options as one type. The topic separates “statutory stock options” from “nonstatutory stock options”.
- Assuming no tax cost at an ISO exercise. The topic says “you may be subject to alternative minimum tax in the year you exercise an ISO”
- Treating every sale as a capital gain. The topic says that without the holding period “you’ll have to treat income from the sale as ordinary income”
- Expecting Form 3921 for an employee stock purchase plan. The topic names “a Form 3922” for that plan and Form 3921 for an ISO.
Related: IRS tax topics by number, ESPP qualifying disposition holding period, ESPP disqualifying disposition, Form 6251 line 2i incentive stock options, ISO AMT bargain element calculator, and Sell to cover with stock options.
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- IRS, Topic no. 427, Stock options (irs.gov): https://www.irs.gov/taxtopics/tc427
- IRS, Tax topics index (irs.gov): https://www.irs.gov/taxtopics
Read from the IRS pages linked above on October 24, 2026. General information, not tax or legal advice. The IRS topic page and the instructions for your own form control, and your own facts decide the outcome.