How do I calculate the cost basis on stocks bought through exercised options?

Your cost basis in stock acquired by exercising stock options generally equals what you paid to acquire the shares, plus any amounts that were taxable to you as compensation, plus certain acquisition-related fees. The exact calculation depends on the type of stock option.

Incentive Stock Options (ISOs)

Regular federal income tax basis

For regular tax purposes, your cost basis is:

Exercise price × number of shares

• No ordinary income is recognized at exercise if ISO requirements are met.
• The “bargain element” (FMV − exercise price) is not included on a regular-tax basis.

Alternative Minimum Tax (AMT) basis

For AMT purposes, a separate basis applies:

Exercise price + bargain element

Where the bargain element equals:

FMV on exercise date − exercise price

This AMT basis is used only for computing AMT gain or loss when the shares are later sold.

Nonqualified Stock Options (NSOs / NQSOs)

When you exercise a nonqualified stock option, you generally recognize ordinary compensation income at exercise.

Cost basis calculation

Your basis is:

**Exercise price

• Ordinary income recognized at exercise
• Exercise-related acquisition fees**

The ordinary income amount is typically:

FMV on exercise date − exercise price

Because this income is already taxed as compensation (usually reported on Form W-2 or Form 1099-NEC), it must be added to the basis to prevent double taxation.

Fees and commissions

• Fees paid to acquire the shares (such as option exercise fees or required brokerage execution fees) are generally added to the basis.
• Selling commissions are not added to basis; instead, they reduce the amount realized when you sell the stock.

Common reporting issue

Brokers frequently report an incorrect or incomplete basis on Form 1099-B for stock acquired through option exercises—especially for NSOs. You are responsible for reporting the correct adjusted basis on Form 8949, even if it differs from the broker-reported amount.

2026 Updates:

1. The Reporting Adjustment (Form 8949)

IRS regulations generally prohibit brokers from including the "compensation" (the W-2 income) in the cost basis they report.

• What the Broker Reports: Usually just the Exercise Price (Strike Price).
• What You Must Report: The Adjusted Basis (Exercise Price + W-2 Income).
• The Correction: On Form 8949, you will enter the broker's reported basis in Column (e). You then use Adjustment Code "B" in Column (f) and enter the W-2 income amount as a negative adjustment in Column (g) to correctly increase your basis and lower your taxable gain.

2. ISOs: The "Dual Basis" System

For Incentive Stock Options, you have two different options:

• Regular Tax Basis: This is simply what you paid (Strike Price).
• AMT Basis: This is the Fair Market Value (FMV) on the day you exercised.

In 2026, if you sell ISO shares that you've held for several years, you must track your AMT cost basis separately on Form 6251. If you don't, you might fail to claim a "negative AMT adjustment," meaning you'd effectively pay tax twice on that same bargain element.

3. Nonqualified Stock Options (NSOs)

For NSOs, the calculation is more straightforward but more expensive upfront:

Cost Basis=(Exercise Price×Shares)+W-2 Ordinary Income+Fees

Note for 2026: If your total compensation (including the NSO spread) exceeds $1 million, your employer was required to withhold federal tax at the higher 37% supplemental rate rather than the standard 22%. This doesn't change your basis, but it does mean you’ve already "pre-paid" more of the tax that your basis is designed to protect.

Source:s

• IRS Publication 551, Basis of Assets
• IRS Publication 525, Taxable and Nontaxable Income
• Internal Revenue Code § 83
• Treasury Regulation § 1.83-1
• Internal Revenue Code § 421
• Internal Revenue Code § 422
• Internal Revenue Code § 56(b)(3)
• Treasury Regulation § 1.1012-1
• IRS Instructions for Form 8949 (2025)
• IRS Publication 550, Investment Income and Expenses (2025)