About Incentive Employee Stock Options
Incentive employee stock options (ISO) are a type of employee stock option that can qualify for capital gains tax rates. This tax benefit does not apply to other types of employee stock options, sometimes called non-statutory stock options. Like all employee stock options, ISOs are call options that confer the right (but no obligation) to buy a specified number of shares for a predetermined "strike" price until the option expires.
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Preconditions
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To qualify for capital gains on incentive employee stock options the person must be an employee of the corporation or a subsidiary.
Strike Price
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The strike price must be no lower than the market price of the stock at the time the incentive stock option is issued to the employee.
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Time Frame
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The employee must hold the option for at least one year before exercising it, and then hold the stock for one additional year to qualify for capital gains tax rates.
Taxable Profit
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The capital gains rate applies to the difference between the strike price and the market price at the time the employee sells the stock.
Corporation Taxes
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Companies sometimes prefer non-statutory stock options to ISOs because they get a tax break that does not apply to incentive stock options.
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