Nq vs iso stock option
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First, you may be eligible to receive only NQSOs , so read the FAQs on the requirements of ISOs. Second, your stock plan may permit only the granting of either NQSOs or ISOs. Third, your company, not you, decides which type of option to grant.
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Whether one type of option is better than the other depends on what you do with the shares that you acquire at exercise and whether you feel comfortable with the complexities of the alternative minimum tax AMT , which can apply to ISOs. If you immediately sell the shares at exercise, the taxation is essentially the same i.
If you plan to hold the shares, some tax benefits exist with ISOs as long as the stock continues to appreciate. If you hold the shares for one year after exercise and two years after grant, ISOs can provide favorable long-term capital-gains tax treatment on all the stock-price appreciation over the exercise price see the related FAQ.
Incentive Stock Options (ISOs) vs. Non-Statutory Options (NSOs) | VC Experts Blog
But if the stock price of a company's shares underlying an ISO appreciates significantly before rather than after exercise, an ISO exercise can generate alternative minimum tax AMT. To pay that liability, you may be forced to sell some of your shares in a so-called "disqualifying disposition" of the ISO shares. This gives rise to ordinary income in much the same way that the exercise of an NQSO would, though taxes on this ordinary income are not withheld by the company.
You also may be stuck with paying AMT on the spread at exercise even though the stock price at tax time is much lower see a related FAQ. If you make a disqualifying disposition of an ISO, the sale of the ISO shares does not give rise to wages for Social Security and Medicare purposes as would the exercise of an NQSO. This ends up saving you and your employer at least the Medicare portion of the Social Security tax of 1.
We cannot stress enough that in a volatile stock market ISOs require you to plan for AMT, which is discussed in detail in other FAQs. For details on the tax reporting for ISOs, see the relevant area of the section Reporting Company Stock Sales in the Tax Center. For a comparison of ISOs and NQSOs from your company's perspective, see another FAQ.
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Is it better to be granted nonqualified stock options NQSOs or incentive stock options ISOs? Prior FAQ in list.
Employee Stock Option Taxes: What You Need to KnowNext FAQ in list.