Understanding Stock Options
Stock options typically come in two main types, described briefly below:
Incentive Stock Options (ISOs):
Incentive Stock Options or ISO’s are offered by companies to their employees and may qualify for favorable tax treatment is certain specific conditions are met. Any gain on their sale may qualify to be taxed as a long term capital gain instead of ordinary income, if the holding period requirements are met. They may also be subject to Alternative Minimum Tax or AMT in some cases.
Non-Qualified Stock Options (NSOs):
NSO’s or Non-Qualified Stock Options may be granted to employees, consultants and/or Members of the Board. Any gain of such stocks are taxed as ordinary income when the options are exercised and can be potentially subject to additional taxes when you sell such stock options.
Apart from the above two, there are other stock option types as well – such as Restricted Stock Options (RSO’s) and Employee Stock Purchase Plans, commonly referred to as ESPP’s.