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An incentive stock option (ISO) is a type of stock option that qualifies for special tax treatment under the Internal Revenue Code if it meets certain requirements.
ISOs are not granted by all companies and can be granted only to employees (not to outside consultants or contractors). There is a $100,000 limit on the aggregate grant value of ISOs that may first become exercisable (i.e., vest) in any calendar year (see another FAQ for details). Also, to retain their tax benefits after a termination of employment, ISOs must be exercised within three months after you leave your job.
After you exercise the options, if you hold the stock for at least two years from the date of grant and one year from the date of exercise, you receive favorable long-term capital gains tax treatment for all appreciation over the exercise price (see a related FAQ on ISO taxation). Don't overlook the significant impact that ISO exercises and sales may have upon calculations of alternative minimum tax (AMT). |
