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Definition of Incentive Stock Options (ISOs)

Incentive stock options (or ISOs) are a certain type of tax-advantaged stock option. Only employees are eligible to receive ISOs, whereas employees and non-employees (e.g., contractors, consultants, advisors, etc) are eligible to receive non-qualified stock options (or NSOs).

Below is a table to help illustrates some of the key tax differences between ISOs and NSOs:

Tax at Grant
No tax (if granted at FMV)
No tax (if granted at FMV)

Tax at Vesting
No tax (if granted at FMV)
No tax (if granted at FMV)
Tax at Exercise
No ordinary income, capital gains, or employment tax. However, the difference between the FMV and exercise price is treated as income for purposes of calculating AMT.
The spread between FMV and exercise price is taxed as ordinary income.

Tax at Sale
Sale price less exercise price taxed as long-term capital gains, so long as held for 1 year past exercise and 2 years past grant date.
Sale price less FMV at exercise taxed as long-term capital gains if held for 1 year past exercise.

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