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, you must be an employee of the company from the time of grant until three months before exercise. If your company allows you to exercise your ISOs after 90 days (at many companies vested, unexercised options expire 90 days after termination), the ISOs become NQSOs and are taxed as NQSOs at exercise (see a related FAQ). In some situations the three-month mark occurs on the 91st or 92nd day, so you may retain ISO treatment at exercise even after the 90-day point.
Alert: The three-month mark can be more favorable, so note any difference in length from the 90-day period. Switching into the role of a consultant or an advisor after your termination is not likely to be considered a continuation of employment that lets your grants remain ISOs after three months. See the case of Humphrey v. Commissioner (US Tax Court, 2006-242).