Non-qualified stock options (NSOs) are a type of stock option that is not eligible for favorable tax treatment. They are also referred to as non-statutory stock options. NSOs are typically offered as part of an employee compensation package, and they give employees the right to buy company stock at a predetermined price within a certain time frame.
When an employee exercises an NSO, they are required to pay ordinary income tax on the difference between the exercise price and the fair market value of the stock at the time of exercise. The company issuing the NSOs is also entitled to a tax deduction for the same amount.