Delaware Incentive and Nonqualified Share Option Plan
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How to fill out Incentive And Nonqualified Share Option Plan?
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FAQ
In practice, there's no material difference between ISOs and NQOs. However, ISOs may have the advantage in situations where employees should reasonably exercise and hold (for instance, the company goes public). The tax regulations for option grants and exercises are very complicated and can change at any time.
Unlike NQSOs, ISOs cannot be transferred to others (e.g. upon divorce or by gifting).
Nonqualified: Employees generally don't owe tax when these options are granted. When exercising, tax is paid on the difference between the exercise price and the stock's market value. They may be transferable. Qualified or Incentive: For employees, these options may qualify for special tax treatment on gains.
If a stock option isn't an ISO, it's typically referred to as a nonqualified stock option. NQOs don't qualify for special tax treatment. The favorable tax treatment is the main advantage of ISOs for employees, and this includes long-term capital gains and no recognition of income when they exercise their options.
For example, RSU and NQSO have different rules about when they are taxed (RSUs at vesting, no choice) (NQSOs at exercise, choice of timing). It's also reasonable to assume that when offered the choice, you may get ?more? NQSOs than you would RSUs. And finally, RSUs do not cost anything to purchase, whereas NQSOs do.
ISOs have more favorable tax treatment than non-qualified stock options (NSOs) in part because they require the holder to hold the stock for a longer time period. This is true of regular stock shares as well.
A major difference is that the NSO tax is withheld at the point of exercise whereas the potential AMT on ISOs isn't due until you file taxes next April. You won't know if you are even subject to AMT until after your taxes have been calculated.
Taxation on nonqualified stock options As mentioned above, NSOs are generally subject to higher taxes than ISOs because they are taxed on two separate occasions ? upon option exercise and when company shares are sold ? and also because income tax rates are generally higher than long-term capital gains tax rates.