From sawicky at epinet.org Tue Oct 10 08:40:22 2000
the short answer is the option is not taxed when received
or exercised, only when the stock is sold.
In practice, most stock options are dealt with using "cashless exercise" which means you simultaneously a) exercise the option and b) sell the stock; you net, in cash, the difference.
Options can be taxed at grant time if the strike is below market value (the difference is ordinary income); in practice, people try to avoid this.
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Doug's initial forwarding of the article begs the question: what's wrong? If it's the absurdity of a company who "made $2.8B paid no tax" then you just need to think about it harder (and remember the lesson of AMT!); if it's that the tax coffers should benefit from Cisco's success, it appears that more tax is paid by the individuals (who are also less likely to be able to hide their gains than corporations) who exercised.
/jordan