How are NSOs taxed when I exercise them?

When you exercise non-qualified stock options, the bargain element – the difference between the fair market value and your strike price – is treated as ordinary compensation income that day. It's added to your W-2 and subject to income tax plus Social Security and Medicare, exactly like salary. Your employer typically withholds at the 22% supplemental rate, which may understate your true bracket. That FMV at exercise becomes your cost basis, so when you later sell, only the gain above it is a capital gain – short-term if you hold under a year, long-term if over. A frequent error is double-counting the bargain element as both wages and capital gain; check that your broker's 1099-B basis matches the FMV at exercise, not just the strike price.