You are awarded a stock option as part of a contract to perform work. 1-1/2 years later, the company buys back youe stock option (the option was never exercised and no stock was ever issued). The company wanted to cancel the stock option and also wanted to modify my contract with the company. I was required to give up valuable elements of the contract (sales territory, new concept development rights, etc) in return for the company purchasing my stock option. How do you treat the funds received for the purchase of my stock option and can I deduct from these funds the value of the items that I was required to give up?
This would depend on which country you are in. For example, in the US this would normally be considered capital gains. Basically, when you are issued the options, you should pay income tax on the fair value of the options (using black scholes method, for example). At that point, you have an asset (the options). If you turn around and sell those options, then you have sold an investment. It should be just like buying and selling options in the marketplace.