Income recognition for non-stock options is based on the option's type and fair market value. The general guidelines are as follows:

When you exercise an NSO, income is recognized. The income is the difference between the fair market value of the stock when it is exercised and the exercise price. This amount is categorized as ordinary income and is subject to payroll taxes.

At a certain point in time, stock options allow the right to purchase stock at a set exercise price. The grant date does not result in any recognition of income. Ordinary income is recognized for the bargain element in non-stock options at the exercise date. The basis equals the fair market value at the exercise date.