Incentive stock options (ISOs) are potentially quite valuable. However, they are more rule-bound, complex, and risky than nonqualified stock options (NQSOs). In fact, mistakes with ISOs can be quite costly. This article presents five key aspects of ISOs that you must know at the time of grant, before you exercise the options, and when you sell the shares.
The final rules clarify and consolidate a tangle of proposed, temporary, and final regulations, as well as other guidance, that governed the taxation of ISOs, including rules for disqualifying dispositions.
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The final rules clarify and consolidate a tangle of proposed, temporary, and final regulations, as well as other guidance, that governed the taxation of ISOs, including rules for the $100,000 ISO limit.
The final IRS regulations on ISOs, last modified in 2004, clarified points that are of greater concern to ISO-granting companies than to individual optionholders and advisors (they did not affect the basic tax structure or the AMT treatment). However, for the purposes of ISO-related financial planning, the rules do clarify certain advanced topics, such as the wash sale rule, stock swaps, transfers to trusts, and transfers in divorce, and they confirm current interpretations and practices. A detailed discussion about the background of the final ISO regulations occurs in the text of the proposed regulations.
Featuring reverse vesting, early-exercise stock options are usually granted only by pre-IPO companies. The IRS regulations on ISOs increase risk in early-exercise options, making it crucial that you understand the tax treatment.