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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.
Taxes and Incentive Stock Options Your employer isn't required to withhold income tax when you exercise an Incentive Stock Option since there is no tax due (under the regular tax system) until you sell the stock.
Unlike NQSOs, ISOs cannot be transferred to others (e.g. upon divorce or by gifting).
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.
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.
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.
The main difference between ISOs and NSOs is that ISOs come with no tax liability on exercise, but come with a set of requirements, whereas NSOs come with tax liability on exercise, but do not have the same requirements.