What is the timing of income recognition for nonstatutory stock options?

The timing of income recognition for nonstatutory stock options involves multiple events, which is why the correct answer encompasses several key milestones. Nonstatutory stock options, also known as nonqualified stock options (NSOs), trigger taxable income at different points.

When an employee receives nonstatutory stock options, there is typically no immediate tax implication since the options themselves do not constitute income. However, once the option is exercised—when the employee buys the stock at the predetermined price—this is when the employee recognizes income. The taxable income is generally the difference between the fair market value of the stock at the time of exercise and the option price (the amount paid to acquire the stock).

Additionally, any subsequent sale of the stock can also result in further tax implications, specifically the capital gains or losses based on the selling price compared to the adjusted basis (which includes the income recognized at the time of exercise).

This context illustrates why timing of income recognition for nonstatutory stock options is accurately reflected in the choice that mentions receipt of the option, exercise of the option, or disposal of the stock. Each of these events can impact the taxpayer's income recognition in different ways.