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That leads to two transactions. The exercise of the option is not actually a taxable event. The taxable event is selling the stock. Because this stock was acquired through an employee stock option, tax law deems the income to be ordinary wage income rather than a capital gain.

I'm going to nit-pick on Peter here, based on my experience of exercising employee stock options.

Two events are correct, but both of them are taxable:

1. Exercise the options. That's a taxable event generating ordinary income of the difference between the grant (strike) price and the market price at the time of the event. You need to tell your broker how you're going to pay for the shares (grant price times shares). This income shows up on your W-2.

2. Selling the shares. This is often done immediately after exercising the option, and is (usually) called a "same day sale" when requesting the option exercise. This is also a taxable event, short term security sale. It's usually a very small gain or loss, depending on the market price change in the time period between events 1 and 2. At least, my broker never managed to do it at exactly the same price. This event generates a 1099 (1098? - I can never remember).

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