Incentive Stock Option (ISO)
An employer-granted option to purchase company stock that, if held long enough, qualifies for preferential long-term capital gain treatment but creates Alternative Minimum Tax (AMT) on exercise.
Detailed Explanation
ISOs receive preferential tax treatment under IRC Section 422: no ordinary income on grant or exercise, and long-term capital gain on sale if the qualifying holding period is met (more than two years after grant and more than one year after exercise). The bargain element at exercise (FMV minus strike price) is an AMT preference, often triggering large AMT bills with no cash from the shares. Disqualifying dispositions convert part of the gain to ordinary income reported on the W-2.
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Learn about Tax Planning & StrategyRelated Terms
Alternative Minimum Tax (AMT)
A parallel federal tax system that ensures high-income taxpayers pay a minimum amount of tax by limiting certain deductions and preferential treatments.
Restricted Stock Unit (RSU)
A form of employer equity compensation that delivers shares (or cash equivalent) to an employee upon vesting, taxed as ordinary income at vesting.
Capital Gain
The profit realized from the sale of a capital asset such as stock, real estate, or cryptocurrency, taxed at preferential rates if held longer than one year.
Non-Qualified Stock Option (NQSO / NSO)
An employer-granted stock option that creates ordinary income at exercise equal to the bargain element, with employer-side payroll tax withholding.
Employee Stock Purchase Plan (ESPP)
A program letting employees buy company stock at a discount (typically 5 to 15 percent) through payroll deduction, with potentially favorable tax treatment if holding-period requirements are met.
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