Final answer:
The difference between a nonqualified stock option (NSO) and an incentive stock option (ISO) lies in their tax treatment and eligibility, with ISOs offering potential tax benefits to employees and NSOs being more broadly available without special tax advantages.
Step-by-step explanation:
Difference Between Nonqualified and Incentive Stock Options
The main difference between a nonqualified stock option (NSO) and an incentive stock option (ISO) lies in their tax treatment and eligibility requirements. An ISO is a type of company stock option that can offer preferential tax treatment and must meet specific IRS requirements. They are available only to employees and can be taxed at a capital gains rate if certain holding period requirements are met. Conversely, an NSO does not offer special tax treatments and can be granted to employees, directors, consultants, and advisors. Unlike ISOs, NSOs are taxed as ordinary income when exercised, based on the difference between the exercise price and the fair market value at exercise.
When considering the incentives for choosing one over the other, a person might choose an ISO for the potential tax benefits, while an NSO might be chosen for its fewer restrictions and broader eligibility. How one's choices might change with different incentives depends on individual financial goals, tax situations, and the conditions and terms offered by the granting company.