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What Is a Non-Qualified Stock Option (NSO)? A non-qualified stock option (NSO) is a type of employee stock option wherein you pay ordinary income tax on the difference between the grant price and the price at which you exercise the option.
The Cost Basis of Your Non-Qualified Stock Options The cost basis is necessary because it is used to calculate capital gain/loss upon a subsequent sale of the exercised stock. The cost basis, generally speaking, is equal to the exercise price, multiplied by the number of shares exercised.
Taxation. The main difference between ISOs and NQOs is the way that they are taxed. NSOs are generally taxed as a part of regular compensation under the ordinary federal income tax rate. Qualifying dispositions of ISOs are taxed as capital gains at a generally lower rate.
NQOs are unrestricted. As such, they can be offered to anyone. That means that you can extend them to not just standard employees, but also directors, contractors, vendors, and even other third parties. ISOs, on the other hand, can only be issued to standard employees.
NSOs vs. RSUs NSOs give you the option to buy stock, but you might decide to never exercise them if the company's valuation falls below your strike price. In comparison, restricted stock units (RSUs) are actual shares that you acquire as they vest. You don't have to pay to exercise RSUs; you simply receive the shares.
Stock options grant employees the right to purchase shares, but it's not an obligation for them to do so. ISOs have the potential for favorable tax treatment. 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.
Income tax upon exercise When you exercise NSOs and opt to purchase company shares, the difference between the market price of the shares and your NSO strike price is called the ?bargain element.? The bargain element is taxed as compensation, which means you'll need to pay ordinary income tax on that amount.
Incentive stock options (ISOs) are a form of equity compensation that allows you to buy company shares for a specific exercise price. ISOs are a type of stock option?they are not actual shares of stock; you must exercise (buy) your options to become a shareholder.