Glossary: Non-Qualified Stock Option

Non-Qualified Stock Option

Non-Qualified Stock Option or NSO or Non-Statutory Stock Option - A Non-Qualified Stock Option is an employee stock option offering greater structural flexibility than an incentive stock option. The trade off is that an incentive stock option has certain tax advantages for the employer and for the employee that are not available with a non-qualified stock option. 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 Internal Revenue Code 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 nonqualified stock options at exercise will be 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.

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