Incentive Stock Options

Incentive stock options abbreviated as ISOs, are a type of employee stock option that can be granted only to employees and grant a United States tax benefit. Incentive stock options are also sometimes referred to as Incentive Share Options or Qualified Stock Options by IRS

Incentive stock options = Incentive Share Options = Qualified Stock Options

Incentive stock options  are a form of equity compensation that provides unique tax benefits  and significant tax complexity. In recent years their popularity has grown to roughly match the popularity of nonqualified stock options.

The holder of Incentive stock options does not pay ordinary income tax, and options are taxed at the capital gains rate.  The Wall Street Journal’s Smart Money reveals that as long as the holder doesn’t sell the stocks received, there is not requirement to immediately pay taxes.  Taxes must be paid when the employee sells, but the transaction may qualify for the maximum rate of 15 percent on long-term capital gains.

Although Incentive stock options have more favorable tax treatment than non-qualified stock options, they also require the holder to take on more risk by having to hold onto the stock for a longer period of time if the holder is to receive optimal tax treatment.

The Incentive stock options granted cannot be sold within one year of exercising the option, nor within two years. Otherwise it may result in taxable compensation to the holder of the option.