What Are the Tax Implications of ISOs?

There are two main types of stock options: incentive stock options (ISOs) and non-qualified stock options (NSOs). Both are subject to different tax rules. Knowing the difference is an essential part of your financial planning. Of the two, ISOs can be more complicated from a taxation standpoint.

An incentive stock option is an option granted under a plan, if the terms of the option and the plan meet certain Code requirements. By paying the exercise price, the employee acquires the optioned stock. An ISO may have an exercise price of no less than 100% of the stock's value at the date of grant of the option, but of course the stock may appreciate in value after the date of grant. If it does, the employee will be able to acquire stock by paying the lower exercise price rather than its current value.

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