Incentive Stock Option
Incentive Stock Option or ISO
- An Incentive Stock Option is an employee stock
option offering certain tax advantages for the employer that are not available
with a non-qualified stock option. The trade off is that an incentive stock
option lacks the flexibility of a non-qualified stock option. The pricing,
vesting and selling of incentive stock options must follow the strict
requirements of Internal Revenue Code Section 422. For example, you may not
grant incentive stock options at a discount from the current fair market value of
the stock date the option was granted. On the other hand, you may price a
non-qualified stock option at whatever discount is deemed best for the company
in order to hire or retain an especially valuable employee. The tax benefit to
the employee is more favorable under an incentive stock option since no
individual income tax is due when the options are granted or exercised. If the
Employee who exercised the incentive stock option meets the Section 422(b)
holding period requirements then he will recognize a capital gain or loss upon
disposition of the stock, but will not recognize taxable income on the date of
exercise. By comparison, the gain on non-qualified options at exercise is taxed
as ordinary income, and any subsequent appreciation will be taxed as capital
gains.
Disclaimer: The foregoing is intended to provide general information and may not be suitable in specific instances. The glossary information is not intended to be exhaustive, but rather to illustrate typical considerations. The material is provided with the understanding that it is not legal, accounting, tax or any other professional advice.
Disclaimer: The foregoing is intended to provide general information and may not be suitable in specific instances. The glossary information is not intended to be exhaustive, but rather to illustrate typical considerations. The material is provided with the understanding that it is not legal, accounting, tax or any other professional advice.
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