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ISOs have more favorable tax treatment than non-qualified stock options (NSOs) in part because they require the holder to hold the stock for a longer time period. This is true of regular stock shares as well.
Taxation. The main difference between ISOs and NQOs is the way that they are taxed. NSOs are generally taxed as a part of regular compensation under the ordinary federal income tax rate. Qualifying dispositions of ISOs are taxed as capital gains at a generally lower rate.
Companies can choose between two types of stock option plans?incentive stock options (ISOs) and nonqualified stock options (NSOs). Both types grant a holder the right to purchase stock over a future period at a given price and make the holder a legal corporate owner (shareholder) upon exercise.
Nonqualified: Employees generally don't owe tax when these options are granted. When exercising, tax is paid on the difference between the exercise price and the stock's market value. They may be transferable. Qualified or Incentive: For employees, these options may qualify for special tax treatment on gains.
Incentive stock options, or ISOs, are a type of equity compensation granted only to employees, who can then purchase a set quantity of company shares at a certain price, while receiving favorable tax treatment. ISOs are often awarded as part of an employee's hiring or promotion package.
At their core, Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQSOs) are similar. With some exceptions, both are options to purchase a company's stock at a predetermined exercise price after a certain period of time or after the achievement of milestones.
Taxation. The main difference between ISOs and NQOs is the way that they are taxed. NSOs are generally taxed as a part of regular compensation under the ordinary federal income tax rate. Qualifying dispositions of ISOs are taxed as capital gains at a generally lower rate.