What Does Code V in Box 14 on a W-2 Mean?

The Form W-2, Wage and Tax Statement, is a document employers send to employees and the Internal Revenue Service (IRS) at the end of each year. It reports an employee’s annual wages and the amount of taxes withheld from their paycheck. While some boxes report standard wage information, Box 14 is a catch-all space where employers can provide additional details about other compensation or deductions. An entry in Box 14 related to stock options can be confusing, as the official reporting for this income occurs elsewhere on the W-2.

Understanding Stock Option Income on Your W-2

If you have income from non-statutory stock options (NSOs), your employer reports it in Box 12 of your W-2 using Code V. This amount represents the “bargain element,” which is the difference between the stock’s fair market value (FMV) when you exercised the options and the price you paid for them. While Box 12 is the official reporting location, some employers add a note in Box 14 with a description like “NSO” for clarity.

NSOs give you the right to purchase company stock at a predetermined grant price. The IRS considers the bargain element to be compensation income because it is an economic benefit from your employment. This income is subject to federal income tax withholding, Social Security, and Medicare taxes at the time of exercise.

For example, if you exercise 100 NSOs with a grant price of $15 per share when the stock’s FMV is $40 per share, the bargain element is $2,500. This is calculated as the price difference ($25) multiplied by the number of shares (100), and it is the amount reported in Box 12 with Code V.

How This Income Appears on Your W-2

The amount shown in Box 12 with Code V is for informational purposes. This figure has already been included as part of the total wages reported in other boxes on your W-2, so you should not add this number to your income again. Doing so would result in double-counting the same income.

The income from the NSO exercise is included in Box 1 (Wages, tips, other compensation). This amount is also included in Box 3 (Social Security wages), up to the annual wage base limit, and in Box 5 (Medicare wages).

Tax Return and Cost Basis Implications

When you file your federal income tax return, you do not need to take special steps to add the amount from Box 12 to your income. Since the NSO exercise income is already factored into the total wages in Box 1 of your W-2, it automatically flows to your tax return when you report your Box 1 wages. The Box 12 entry simply confirms where a portion of your wages came from.

A key consequence of exercising NSOs is establishing your cost basis in the shares. Your cost basis is the total amount you have invested for tax purposes. For shares from an NSO exercise, the basis is calculated by adding the amount you paid for the stock (the exercise price) to the compensation income you recognized (the bargain element).

Using the previous example, your purchase price was $1,500 (100 shares x $15), and you recognized $2,500 in compensation income. Your total cost basis in the 100 shares is therefore $4,000 ($1,500 + $2,500), or $40 per share.

When you later sell these shares, you will report the sale on Form 8949, Sales and Other Dispositions of Capital Assets. The cost basis reported by your broker on Form 1099-B may not include the compensation income component, so you must adjust it yourself to calculate your gain or loss correctly and avoid overpaying taxes.