1.
Incentive Stock Option. A type of
employee stock option which provides tax advantages for the employer that a
non-qualified stock option does not, but which is
subject to more stringent requirements. For ISOs, no
income tax is due when the
options are granted or when they're exercised. Instead, the tax is deferred until the
holder sells the
stock, at which time he/she is
taxed for his/her entire
gain. As long the
sale is at least two years after the options were granted and at least one year after they were exercised, they'll be taxed at the
lower,
long-term capital gains rate; otherwise, the sale is considered a "disqualifying
disposition", and they'll be taxed as if they were nonqualified options (the gain at
exercise is taxed as
ordinary income, and any subsequent
appreciation is taxed as
capital gains).
ISOs may not be granted at a
discount to the current
stock price, and they are not
transferable,
except through a will.
also called qualified stock option.