nonstatutory or nonqualified stock options (non-quals)
Nonstatutory or nonqualifiied stock options are employee stock options that do not qualify for the special tax treatment of Incentive Stock Options. Incentive Stock Options are only taxed, if certain requirements are met, after the stock options have been exercised and sold. If the requirements are met, the income derived from the sale of the stock options is taxed at the long-term capital gains rate which is significantly lower than the ordinary income tax rate.
Nonstatutory or nonqualified stock options by contrast are taxed at exercise. The taxable income is defined as the difference between market value of the stock option on the exercise date and the exercise price. The resulting sum needs to be included as ordinary income for the exercising optionee.
Employers prefer Nonstatutory or Nonqualified Stock Options because the employer is allowed to take a tax deduction equal to the difference between the market value of the stock option on the exercise date and exercise price.
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