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ISOs: Taxes

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IRS Form 3921 For Incentive Stock Options: What You Need To Know, And How It Can Help You Understand ISO Taxation This is premium content

Bruce Brumberg
Incentive stock option (ISO) exercises made during a calendar year are reported to you and the IRS on Form 3921 early in the following year. This article explains what you need to know about the information on the form, and how the form can help you better understand the complexities of ISO taxation.

Stock Option Fundamentals (Part 5): Incentive Stock Option Taxation & Alternative Minimum Tax This is premium content

Marilyn Renninger
Learn how and when income from ISOs is subject to taxes, including the alternative minimum tax. You must consider taxes at both exercise and sale to put together an optimal strategy.

Stock Option Fundamentals (Part 3): Income Taxes And Withholding This is premium content

Marilyn Renninger
Here's some advice for financial fitness: take stock of taxes before you exercise! When and how you exercise your stock options can have a major impact on how much tax and which taxes you'll pay.

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.)

Treasury And IRS Regulations For Incentive Stock Options

IRS and US Treasury Department
This updated and clarified the regulations on ISOs. The regulations are of greater concern to corporations than to individual optionholders and advisors (e.g. no changes to the basic tax structure or AMT treatment). For ISO planning, the rules clarify certain advanced topics, such as the wash sale rule, stock swaps, and transfers to trusts and in divorce, and they confirm current interpretations and practices.

Proposed Regulations For ISOs

US Treasury Department
The proposed regulations on ISOs, which are very similar to the final rules, contain a more detailed background and discussion of the provisions than the final version does. The similar section in the final regulations focuses on revisions and clarifications of the proposed rules.

Taxable And Nontaxable Income:
IRS Publication 525

Internal Revenue Service
This IRS publication explains the tax treatment of many kinds of income, including that from NQSOs, ISOs, and restricted stock/RSUs.

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W-2 diagram! What will my W-2 show after I exercise incentive stock options? This is premium content

For an ISO exercise in which you hold the stock, nothing is...

What do I need to know about the information on IRS Form 3921 for incentive stock options? This is premium content

Your company is required to file Form 3921 with the IRS and either give you a copy or present the same information on a substitute document. With this reporting, the IRS now knows more information about your ISO exercises than it did before, particularly with regard to...

What are the tax consequences of exercising an ISO?

The taxation of incentive stock options (ISOs) is complex. The tax impact depends on when you sell or transfer the stock received at exercise. If you make what is called a disqualifying disposition (e.g., an early sale or a gift) of ISO shares, ordinary compensation income and any capital gains/losses will be determined by your...

Has recent legislation changed the taxation of incentive stock options? This is premium content

Not directly. However, the American Taxpayer Relief Act (ATRA) has three provisions on the alternative minimum tax (AMT) calculation that are important for high-income taxpayers...

How am I taxed on my gain from a sale of stock that I acquired in an ISO exercise? This is premium content

First: Remember that the sale of ISO stock will raise AMT implications (alternative minimum tax). Second: The matter depends on how long you hold the stock...

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...

How am I taxed if I make a disqualifying disposition (e.g. sale) of ISO shares in the year I exercised the option? This is premium content

While you lose the opportunity to have the lower long-term capital gains rate apply to the difference between the exercise and sale price, the alternative minimum tax (AMT) no longer applies. You do have compensation income and perhaps short-term capital gains equal to...

What are the ISO withholding rules?

Unlike with NQSOs, there is no federal income tax withholding at...

What tax treatment applies after ISOs are converted to NQSOs? This is premium content

To have beneficial tax-qualified status, grants of ISOs must have certain characteristics and must follow...

I hear that when I sell my ISO stock at exercise or within one year I'm taxed as if I had NQSOs. Does this mean that on the spread at exercise (or when I sell the stock) there is withholding and Social Security and Medicare tax? This is premium content

No. What this means is that you will not have the favorable tax treatment that you get with ISOs when you hold the stock one year from exercise and two years from grant...

If I plan to sell my ISO stock before the end of the required holding periods (i.e. a disqualifying disposition), is there any tax advantage to receiving ISOs instead of NQSOs? This is premium content

Yes. Unlike with NQSOs, federal tax laws currently provide that Social Security taxes are not owed upon exercise of ISOs, regardless of whether you soon sell the stock...

My company allows me to exercise my ISOs more than 90 days after I leave my job. What is the tax treatment at exercise?

The Internal Revenue Code is very clear on the requirements of favorable tax treatment for ISOs. Among other conditions...

What are capital gains and capital losses? What are the capital gains tax rates?

Capital gain is income that arises from the sale of a capital asset. Gain from the sale of securities held for investment, such as shares acquired from stock compensation...

When does my holding period for capital gains begin? At exercise or vesting?

The holding period to determine whether a capital gain is long-term or short-term starts on the...

What happens if I have a capital gain from one sale of company stock and a capital loss from another sale of company stock or another security? This is premium content

The treatment for tax-loss harvesting is similar to that of owning and selling any two stocks. The income-tax reporting for multiple transactions is...

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