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A nonqualified stock option, or NQSO, is a type of stock option that does not qualify for special tax treatment under the US Internal Revenue Code. It is the most common form of stock option and may be granted to employees, officers, directors, and consultants and other providers of goods and services. With NQSOs, companies have more flexibility than they do with incentive stock options (ISOs) in setting the exercise price and most other terms, though they need to be careful about granting discounted stock options. Subject to shareholder tolerance for dilution of their ownership percentages, there are no limits on the number of NQSOs that may be authorized under a stock option plan.
When you exercise NQSOs, you receive ordinary income (to the extent the market value of the stock exceeds the exercise price). Your company receives a corresponding tax deduction as long as it reports your income to the IRS. For more information on the taxation of NQSOs, see the articles and FAQs in NQSOs: Taxes and in the Tax Center. |
