What Does W-2 Box 12 Code V Mean for Your Taxes?

The annual Form W-2, Wage and Tax Statement, summarizes your earnings and the taxes your employer withheld. While many boxes are straightforward, Box 12 can be confusing because it reports compensation and benefits using lettered codes. Understanding these codes is necessary for accurate tax filing, and this article explains the meaning and tax implications of Code V in Box 12.

Understanding the Source of Code V Income

The amount reported next to Code V on your W-2 represents income from exercising non-statutory stock options (NSOs). An NSO is a form of employee compensation that gives you the right to purchase company stock at a predetermined price, known as the exercise or strike price. Unlike other types of stock options, NSOs do not qualify for special tax treatment under the Internal Revenue Code.

This amount is the “spread” between the stock’s fair market value (FMV) on the day you exercised the options and the price you paid for them. The calculation is the FMV per share minus your exercise price per share, with the result multiplied by the number of shares you purchased.

For instance, imagine you exercise 100 NSOs at a strike price of $10 per share. On the date you exercise, the stock’s FMV is $35 per share. The spread is $25 per share ($35 FMV – $10 strike price). Your total income from this event, and the amount reported under Code V, would be $2,500 (100 shares x $25 spread). This amount is considered compensation income by your employer.

Impact on Your W-2 Taxable Wages

The amount shown in Box 12 with Code V is for informational purposes and has already been included in your total taxable wages. You should not add this figure to your income again when preparing your tax return, as this would result in double taxation. The Code V amount is a breakout of a specific type of income you received.

The income from an NSO exercise is treated as supplemental wages. This means the income is included in the wage figures reported in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages). This income is subject to all ordinary payroll taxes, including federal income tax withholding, Social Security, and Medicare taxes.

Your employer is responsible for withholding these taxes when you exercise the options, and the income is taxed as compensation in the year of exercise. When you file your Form 1040, U.S. Individual Income Tax Return, the total from W-2 Box 1 is carried over, and no separate entry is needed for the Code V amount.

Using Code V to Determine Stock Cost Basis

Understanding the Code V amount is important for a future tax event: the sale of the stock you acquired. To correctly report a sale, you must calculate your cost basis, which is the total amount you have invested in an asset. This basis is used to determine your capital gain or loss upon its sale. For shares acquired through an NSO exercise, the calculation involves more than just the price you paid.

The formula for your total cost basis is the amount you paid for the shares, plus the compensation income reported with Code V. Using the prior example, you paid $1,000 (100 shares x $10 strike price). You then add the $2,500 of income reported under Code V, making your total cost basis for the 100 shares $3,500.

This calculation gives you a per-share basis of $35, which equals the stock’s fair market value on the exercise date. Properly calculating your cost basis prevents paying tax on the same income twice. Since the spread was already taxed as ordinary income, including it in your basis ensures it is not taxed again as a capital gain when you sell.

When you eventually sell the shares, you will report the transaction on Form 8949, Sales and Other Dispositions of Capital Assets, and the results will be summarized on Schedule D, Capital Gains and Losses. Your capital gain or loss will be the difference between the sale proceeds and your calculated cost basis of $3,500. The holding period for determining whether the gain or loss is short-term or long-term begins on the day after you exercise the options.