If the employee chooses not to buy the shares, the option can expire unused. Nonqualified options are not included in income unless the value is readily ascertainable. This usually means that the stock has to be traded on the open market. ISOs are more complicated tax-wise and are rarer since an employer can take no tax deduction for them. While an employee may exercise an ISO without recognizing any taxable income, certain circumstances still create a tax.
All income is recognized when the stock is sold.
Finding the value of stock options can be complex. The valuation advisor must usually determine the fair market value of the stock as well as the tax implications of receiving options, exercising them and selling the underlying stock. Although valuation advisors have set up mathematical formulas to measure different aspects of stock option value, the process can still be somewhat subjective. Let s look at an option s time value. In theory, the valuation advisor could calculate the present value of the difference between the option s value at its expiration date and its exercise price.