Incentive Stock Option (ISO)
What it is:
An incentive stock option (ISO) is the right but not theto purchase of a company, usually the holder's employer, for a fixed price by a certain date.
How it works (Example):
stock price and thus shareholder value, which is the primary objective of all businesses. A company's board of directors normally must approve option grants. The value of these options is derived from the price of the employer's stock.are incentive compensation that encourages employees to focus on doing work that increases the
Let's say you work for Company XYZ, and the company grants you options to buy 1,000 shares rise to $60 and you have the right to buy shares for $40, you could exercise your options, pay $40,000 for your shares ($40 x 1,000), and turn right around and sell them in the for $60,000. You'd make $20,000 of easy money. However, that the are only valuable if the stock is trading above $40 per share before the options expire. Usually, companies options with strike prices above the current .
Why it Matters:
There are two primary kinds of employee stock options (ISOs).: nonqualified options (NQOs) and incentive
Holders of ISOs generally don't pay capital gains tax on the difference between the exercise price and the price at which you eventually sell your .when they exercise their options; instead, they pay
So, let's say that three years after your 1,000-option stock is up to $60. You decide to exercise even though only 600 of your options are vested. If you sell the immediately, you make a of 600 x ($60 - $40) = $12,000. But, you pay short-term capital gains tax on that profit, which is, say, 35%, or $4,200., Company XYZ
On the other hand, if you exercise and then hold onto the stock for, say, five years before selling them at $60, you still make a $12,000 profit, but now you pay long-term capital gains tax, which is, say, 15%, making your tax bill $1,800.