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ISOs: Basics

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Articles (Jump to FAQs)

Incentive Stock Options: An Overview Editorial Staff
PowerPoint presentation (in PDF) that the editorial team of developed to provide a convenient crash course on the basics of incentive stock options. (Premium members may request permission to use it at their companies.)

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FAQs (Jump to articles)

What are the top 10 questions I should ask about my stock options?

You should know the answers to the following questions. Understanding the topics involved will help you make the most of your stock options and prevent costly mistakes...

What is an "incentive stock option"?

An incentive stock option (ISO) is a type of stock option that qualifies for special tax treatment...

Will I receive information statements from my company about ESPP purchases or option exercises? Will I receive Form 3922 or Form 3921? This is premium content

Companies make some information available voluntarily, while the reporting of other information is mandatory. Section 6039(a) of the Internal Revenue Code requires companies to send an information statement to employees who have exercised incentive stock options or have made purchases in a tax-qualified Section 423 employee stock purchase plan. ISO exercises are reported on IRS Form 3921. ESPP purchases are reported on IRS Form 3922...

Why don't all companies grant ISOs? What are the disadvantages to companies? This is premium content

Apart from not needing to withhold for ISOs or pay Social Security and Medicare tax, employers derive no real benefit from ISOs. Plus, ISO taxation can be more complex for employees...

What are the holding period requirements of an ISO?

The tax code is very specific about what you must do. If you want all the appreciation over the exercise price to be taxed upon sale at favorable long-term capital gains rates, you must...

What is a disqualifying disposition, what can cause it, and why does my company care?

"Disqualifying disposition" is the legal term for selling, transferring, or exchanging ISO shares before satisfying the ISO holding-period requirements: two years from date of grant and one year from date of exercise. If you sell, transfer, gift, or short the stock too soon, you lose...

Why does my employer require me to give notice of a sale of ISO or ESPP stock? This is premium content

If you make a disqualifying disposition with your ISO or ESPP shares...

Is the gifting or donation of stock that I acquired from an ISO exercise or ESPP purchase a disqualifying disposition? What is the tax treatment for early sale? This is premium content

A disqualifying disposition occurs if you sell, transfer, exchange, gift, or donate the stock that you acquired without...

I receive yearly option grants from my company. If I exercise all the options in one year's grant and sell just part of the ISO stock, is it a disqualifying disposition for all the ISO shares in that grant? This is premium content

No. You have a disqualifying disposition just for the ISO shares that are...

How are ISOs usually handled in divorce? This is premium content

The Internal Revenue Code and IRS regulations prohibit transfers, so grant agreements cannot allow ISOs to be transferred in divorce. When divorce occurs, under the property settlement either...

Is transferring ISO stock into a joint account with my spouse a disqualifying disposition if the stock has not met the holding-period requirements? This is premium content

No. Similarly, the transfer of share certificates into a brokerage account to be held in street name would not be a disposition...

In a divorce agreement, I am transferring to my former spouse ISO stock that has not met the holding period requirement. Is this a disqualifying disposition? This is premium content

The transfer of shares incident to divorce will not be a disqualifying disposition. But...

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