ISO stands for “incentive stock options,” which are a type of stock option offered to employees as a form of compensation. ISOs are granted with the intention of providing employees with a financial incentive to work hard and contribute to the company’s success.
ISOs have tax advantages compared to other types of stock options, such as non-qualified stock options (NSOs). When an employee exercises an ISO, they do not have to pay regular income tax on the difference between the exercise price and the fair market value of the stock at the time of exercise. Instead, if the employee holds the stock for at least two years from the date of grant and one year from the date of exercise, any profit they make on the sale of the stock will be taxed at the lower long-term capital gains tax rate.
ISOs are subject to certain requirements under the Internal Revenue Code, including limits on the number of shares that can be granted to an individual in a given year, restrictions on the exercise price of the options, and eligibility requirements for employees who can receive ISOs.