ISOs vs. NQs

In a nutshell, the difference between an incentive stock option and a non-qualified stock option is the way in which they are taxed.  The exercise of an incentive stock option is not generally a taxable event, whereas the exercise of a nonqualified stock option is (and it is taxed at the ordinary income rate). 

The are complex rules that govern incentive stock options, so you will need the help of an expert tax advisor to work through the issues.  Here are two of the broader rules:

• An incentive stock option may only be issued to an employee of a company. 
• The underlying stock of an incentive stock option must be held for one year after the option is exercised and two years after the initial grant of the option in order for the sale of such stock to qualify for long term capital gains tax treatment.

It is emphasized here that these are only the general rules governing Incentive Stock Options.  Other rules beyond this general description are applicable and must be followed.  Consult your tax advisor regarding these rules.

Advertisement