Nonqualified Stock Options (NSOs) are the most commonly used form of stock option. NSOs do not qualify for special tax treatments like incentive stock options, but they also have less restrictive provisions under the tax law. In the year of exercise, you are taxed at ordinary rates on the spread. The spread is the difference between the current value of the stock and your option price (also called strike/grant price). Federal income and employment taxes will be withheld by your employer at the exercise date. In the year of sale, you will be taxed at the capital gains tax rate on the growth of your stock after you exercise.
The decision of when to exercise your employee stock options can be challenging. There are important factors you should consider in order to make a wise decision.