What Is Box 12 Code V on a W-2?

Your annual Form W-2 summarizes your earnings and the taxes withheld by your employer. While many entries are straightforward, Box 12 uses letter codes to report various forms of compensation that require special attention. An entry in Box 12 with Code V points to a specific type of employee compensation related to stock options that has its own set of tax implications.

Defining Box 12 Code V Income

The amount with Code V in Box 12 of your W-2 represents income from exercising non-statutory stock options (NSOs). An NSO is a form of compensation that gives you the right to purchase company stock at a predetermined price, known as the exercise or strike price. The taxable event occurs when you exercise your right to buy the stock, not when the options are granted.

The figure next to Code V is the total ordinary income from the transaction, often called the “bargain element.” This is calculated as the difference between the stock’s fair market value (FMV) on the exercise day and the price you paid, multiplied by the number of shares purchased. For example, if you exercised options to buy 100 shares at $10 per share when the stock was trading at $25 per share, the total compensation income reported under Code V would be $1,500.

Tax Treatment at the Time of Exercise

The figure shown with Code V in Box 12 is for informational purposes because the income has already been included in the primary wage boxes on your W-2. Your employer adds this amount to your total wages in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages). You can verify this by confirming that the total in Box 1 is greater than your regular salary by the amount in Box 12 with Code V. Because this income is treated as supplemental wages, it is subject to the same tax withholdings as your regular pay, including federal income tax, Social Security tax, and Medicare tax.

Reporting the Subsequent Sale of Stock

Exercising your options is the first taxable event, but a second event occurs if you later sell the shares you acquired. This sale must be reported on your tax return, and calculating your cost basis correctly is necessary to avoid overpaying taxes. Your cost basis is the fair market value of the shares on the date you exercised the options, which is the amount you paid plus the compensation income reported under Code V. Using the correct cost basis prevents the bargain element from being taxed twice.

The sale of the stock is reported on IRS Form 8949, Sales and Other Dispositions of Capital Assets, and then summarized on Schedule D, Capital Gains and Losses. The Form 1099-B provided by your brokerage firm may only report the exercise price as your cost basis. You are responsible for adjusting this figure on Form 8949 to reflect the full amount.

The tax rate on any gain from the sale depends on the holding period, which begins on the day after you exercise the options. If you hold the stock for one year or less before selling, the transaction results in a short-term capital gain, taxed at your ordinary income tax rates. If you hold the stock for more than one year, it qualifies as a long-term capital gain and is taxed at lower rates.