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What is an incentive stock option (ISO)?
An incentive stock option (ISO) is a special benefit that some companies offer to their workers. You may get an ISO grant as a hiring incentive, or as a performance bonus. ISOs are subject to more stringent requirements than non-qualified stock options. ISOs must be granted at no less than the current stock price. The good news is that you don’t pay income tax when the options are granted or when they are exercised. If you sell the stock at least two years after the options were granted and at least one year after they were exercised, you pay tax on the gain at the lower, long-term capital gains rate.The bad news is that if you sell the stock before that time, you pay the gain at exercise at ordinary income tax rates, which can be considerably higher, and you pay capital gains tax on any subsequent appreciation.Return to Questions
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