ISOs: Basics

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FAQs   

What is an "incentive stock option"? 

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

Why don't all companies grant ISOs? What are the disadvantages to companies? 

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? 

If you want all the appreciation over the exercise price to be taxed upon sale at favorable long-term capital gains rates, you must...

UPDATED! Will I receive any mandatory information statement from my company about exercises, purchases, and sales related to my stock options and/or employee stock purchase plan? 

Companies often give employees access to their stock option, ESPP, and restricted stock holdings and transactions with paper statements and/or through a website. Apart from the W-2 and 1099 requirements, Section 6039(a) of the Internal Revenue Code requires companies to...

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? 

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? 

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? 

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

UPDATED! How are ISOs usually handled in divorce? 

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? 

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? 

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

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