Non-qualified stock options (typically abbreviated NSO or NQSO) are
stock options which do not qualify for the special treatment accorded to
incentive stock option
Incentive stock options (ISOs), are a type of employee stock option that can be granted only to employees and confer a U.S. tax benefit. ISOs are also sometimes referred to as statutory stock options by the IRS. ISOs have a strike price, which is ...
s.
Incentive stock options (ISOs) are only available for employees and other restrictions apply for them. For regular
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
purposes, incentive stock options have the advantage that no income is reported when the option is exercised and, if certain requirements are met, the entire gain when the stock is sold is taxed as long-term
capital gains
Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares ...
.
In contrast, Non-qualified stock options (NSOs) are available to regular employees, individual/external contractors, directors, vendors, and other parties. Non-qualified stock options result in additional taxable income to the recipient at the time that they are exercised, the amount being the difference between the exercise price and the market value on that date. NSOs are also not subject to the $100,000 limit rule per year, unlike ISOs.
Non-qualified stock options are frequently preferred by employers because the issuer is allowed to take a tax deduction equal to the amount the recipient is required to include in his or her income.
If they have deferred vesting, then taxpayers must comply with special rules for all types of
deferred compensation Congress enacted in 2004 in the wake of the
Enron scandal known as
Section 409A of the
Internal Revenue Code.
See also
*
Employee compensation in the United States
References
U.S. Internal Revenue Code, 26 U.S.C. § 83 at Cornell's Legal Information InstituteU.S. Treasury Regulation 2011 26 CFR §1.83-7
External links
NSO Taxation
Taxation in the United States
Employee stock option
Employee compensation in the United States
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