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Also known as: ISO, qualified stock options

Incentive Stock Options

TechnicalLegalOperations

Definition

Incentive Stock Options: Incentive Stock Options are a type of employee stock option with favorable tax treatment. If holding requirements are met (1 year from exercise, 2 years from grant), gains are taxed as long-term capital gains rather than ordinary income. ISOs are only available to employees.

Example Usage

“She held her ISOs for the required period and paid only 15% capital gains tax instead of 37% income tax.”

Common Misconceptions

ISOs are always tax-free. AMT (Alternative Minimum Tax) can still apply at exercise.
All employee options are ISOs. There are annual limits, and excess grants become NSOs.
ISO tax benefits are automatic. You must meet specific holding period requirements.

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