What Are The Two Different Types of Employee Stock Options Companies Grant

Employee stock options are a great way for professionals working in venture-backed companies and startups. But in order to get maximum benefits, they need to understand what are the different types of employee stock options they can get from their companies.

There are two types of stock options that companies grant to the professionals: Non-Qualified Stock Options (NSOs), and Incentive Stock Options (ISOs).

Non-Qualified Stock Options

• The NSOs are the most common type of stock options.

• Under the US Internal revenue Code, NSOs does not qualify for special favorable tax treatment, and so is implied as ‘Non-qualified’, for any such consideration.

• These are granted to professionals at different levels, including directors, officers, consultants, and employees.

• NSO tax is applicable when you exercise these stock options. The range for tax application is considered ‘compensation’ and is taxed at usual income tax rates.

• If the shares are put to sale immediately, in a period less than a year from exercise, then it will be taxed at regular income tax rates, and will be considered as short-term capital gain or loss.

• And if the shares are put to sale in a period of more than a year from exercise, it will be taxed at reduced rates, and will be considered a long-term capital gain or loss.

Incentive Stock Options

• Incentive stock options (ISO) are less common than NSOs, and carries a risk of the Alternate Minimum Tax (AMT), but provides several tax benefits.

• Under the US Internal Revenue Code, incentive stock options qualify for special tax treatment, with some conditions compliance.

• Not all companies provide the option of incentive stocks, and is granted only to employees.

• If the employee gets their employment terminated, for any reason, they must exercise their stock option within a period of 90 days.

• When an employee exercise incentive stock options, and keeps that throughout that calendar year, they are entitled for the Alternate Minimum Tax.

• If the shares are put to sale immediately after exercising, then it is taxed as ordinary income tax.

• When the shares are held for at least two years after grant, and a minimum of one year after exercising, then it is considered as ISO long term capital gain.

These are the basic differences between two different types of stock options, employee can be granted with by their company. To gain maximum financial benefits and conditions of ISO and NSO tax, one must be aware of the basic differences between these two.

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