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:
| ISOs | 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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Startups and Stock Options: ISOs vs. NSOs
Explore the world of stock options with our informative guide. Compare Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs), and learn why startups choose one over the other.
