Incentive Stock Options (ISOs)

Incentive Stock Options (ISOs) are a type of equity compensation that gives employees the right to purchase company stock at a set price, typically below the current market value. ISOs are granted to employees as a way to reward them for their work and encourage them to stay with the company.

When an employee exercises an ISO, they are essentially buying company stock at a discount. The difference between the exercise price and the fair market value of the stock on the date of exercise is called the "bargain element." This bargain element is taxed as ordinary income when the ISO is exercised.

The shares purchased under an ISO must be held for at least one year from the date of grant and two years from the date of exercise in order to qualify for long-term capital gains treatment. If the shares are sold before the holding period is met, the bargain element is taxed as ordinary income, and any gain on the sale is taxed as short-term capital gains.

ISOs can be a valuable tool for companies to attract and retain employees. However, it is important to understand the tax implications of ISOs before granting them to employees.

Here are some additional details about ISOs:

* ISOs are not taxed until the employee exercises them.
* The exercise price of an ISO is set at the fair market value of the stock on the date of grant.
* The shares purchased under an ISO must be held for at least one year from the date of grant and two years from the date of exercise in order to qualify for long-term capital gains treatment.
* If the shares are sold before the holding period is met, the bargain element is taxed as ordinary income, and any gain on the sale is taxed as short-term capital gains.
* ISOs can be forfeited if the employee leaves the company before the holding period is met.
* ISOs can be transferred to another employee or to a trust.

If you are considering granting ISOs to your employees, it is important to consult with a tax advisor to make sure you understand the tax implications.