As an employee if the company value is below the strike price you wouldn't exercise your options because it leads to a loss. Exercising options is voluntary.
If you use the options to buy stock and hold it then profits and loss are subject to capital gains tax. Not sure what the minimum holding timeframe is in the US. In my experience most employees don't have the amount of money to buy the stock for long-term investment. To my best knowledge, losses are tax-deductable. Remember even if you own stock there is hardly an open market to sell like there is with publicly traded companies.
As an employee if you exercise the options and you make a profit then the HR/payroll/accounting department will add that as income to the W2 and transfer the money minus income tax to your account. When you do your taxes you fill in the various fields of the W2 into your tax software. That's the best case and usually just takes you a couple of signatures.