Incentive Stock Option 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 Incentive Stock Option 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 transferred.
If the stock is sold more than two years after
the Incentive Stock Option is granted and one year after the Incentive Stock Option 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 Incentive Stock Options. 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 Incentive Stock Options and employee stock options in
general, please see the Tax Prophet's section Employee
The Tax Prophet