ISO means a special stock
option granted to employees of a company as part of their compensation that has certain
In general, there is no tax under the regular tax system
upon receipt of an ISO or upon exercise of the option (converting the option into shares
of stock). The Employee does not pay regular income tax until the stock is sold or
If the stock is sold more than two years after the ISO is
granted and one year after the ISO is exercised (the employee has held the actual stock
for one year or longer), the employee receives the preferential long-term capital gains
rate on the sale of the stock.
Most companies require that employees work for
a requisite period or meet certain performance goals before they are eligible for an ISO.
Once those requirements are satisfied, the options become "vested," regardless
of whether or not he or she chooses to exercise any options.
For additional information on ISOs and employee stock options in general, please see
the Tax Prophet's section Employee
The Tax Prophet