What Are Incentive Stock Options (ISOs) – Taxation, Pros & Cons

You have taxable income or deductible loss when you sell the stock you bought by exercising the option. Instead, the options are taxed at a capital gains rate. Stock options that are granted neither under an employee stock purchase plan nor an ISO plan are nonstatutory stock options. Add these amounts, which are treated as wages, to the basis of the stock in determining the gain or loss on the stock's disposition. That tax is also deferred until such time the stocks are sold. A detailed look at some of the main topics in equity compensation.

Incentive stock options have a special holding period to qualify for capital gains tax treatment. The holding period is two years from the grant date and one year after the stock was transferred to the employee. Form shows the grant date in box 1 and shows the transfer date or exercise date in box 2.

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What Are Incentive Stock Options (ISOs)?

Some employers use Incentive Stock Options (ISOs) as a way to attract and retain employees. While ISOs can offer a valuable opportunity to participate in your company's growth and profits, there are tax implications you should be aware of. First, it's necessary to understand that there are two kinds of stock options, nonqualified options and incentive stock options. With either kind of option, the employee gets the right to buy stock at a price fixed today for a defined number of years into the future, usually You exercise the incentive stock options and sell the stock within the same calendar year: In this case, you pay tax on the difference between the market price at sale and the grant price at your ordinary income tax rate.