Incentive Stock Option (ISO)

An incentive stock option is a type of Stock Option that receives special tax treatment under Section 422 of the Internal Revenue Code, which is why your award agreement may refer to “Section 422.” When you exercise an ISO, you generally owe no regular income tax on the spread, though it may count toward the alternative minimum tax (AMT). If you then hold the shares long enough, everything above the strike price is taxed when you sell, at long-term capital gains rates. To qualify, ISOs can only be granted to employees, their strike price must be at least equal to the stock’s fair market value on the grant date, and they must be exercised within ten years of grant.