My company allows me to exercise my ISOs more than three months 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, ISOs lose their favorable tax treatment if they are not exercised within three months after job termination.
At many companies, vested but unexercised options simply expire 90 days after job termination. However, if your company allows you to exercise your ISOs beyond three months after termination, an exercise after three months causes the ISOs to become NQSOs. The options are then taxed as NQSOs at exercise (see a related FAQ).
Alert: The statutory three-month window can be longer (e.g. 91 or 92 days) than the 90 days allowed by your stock plan before option expiration, so note any difference in length. The stock plan controls. Thus if the three-month period for ISO tax treatment is 92 days but your stock plan dictates 90 days until expiration, you have 90 days to exercise, not 92.