incentive stock options
Incentive Stock Options (also referred to as ISOs) are type of Employee Stock Option that provide favorable tax treatment to the employee relative to Nonstatutory or Nonqualified Stock Options but also come with certain limitations. The basic tax benefit of an ISO is that gains deriving from the ISO can be taxed at long-term capital gains rates when the stock is sold as long as the following requirements are met:
- ISOs may only be granted to employees of the granting company
- ISOs must be granted under an equity incentive plan approved by the company's board of directors
- The option exercise price must be equal to or greater than the fair market value of the company's stock
- The optionee must not at the time of the grant own more than 10% of the voting power of all the stock outstanding
- The option is not transferable to others except by the laws of descent and will\
- The option must be exercised within 3 months of termination of employment
The following video compares ISOs and Nonstatutory or Nonqualified Stock Options.
Tax Benefits of ISOs
Because long-term capital gains income tax rates are lower than ordinary income tax rates, ISO holders can enjoy a large tax benefit on income derived from the sale of ISOs. However, ISOs do not provide as favorable tax treatment as Nonqualified Stock Options do for employers.
Video