Question

What are the key differences between incentive stock options (ISOs) and non-qualified stock options (NSOs)?

Answer 1

Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) have key differences in tax treatment, eligibility, limits, and transferability.

Step-by-step explanation:

Incentive Stock Options (ISOs) versus Non-Qualified Stock Options (NSOs): Key Differences

Both Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) are types of stock options offered by companies to their employees as a form of compensation. However, there are key differences between the two:

1. Tax Treatment: ISOs receive preferential tax treatment compared to NSOs. With ISOs, employees usually don't have to pay taxes on the stock option grant or exercise until they sell the shares. On the other hand, NSOs are subject to ordinary income tax upon exercise.
2. Eligibility and Limits: ISOs are generally only available to employees, officers, and directors of the company, while NSOs can be given to anyone, including consultants and contractors. Additionally, ISOs have limitations on the total value of stock options that can be granted to an individual in a single year (currently $100,000 per year).
3. Transferability: ISOs are not transferable, except in the case of death, while NSOs can be transferred to other individuals or entities.

These differences in tax treatment, eligibility, limits, and transferability make ISOs and NSOs distinct in their benefits and usage.