INCENTIVE STOCK OPTION (ISO) | The World of Accounting For Professional Accountants

stock option granted employees under an option plan that provides a more favorable tax effect than QUALIFIED STOCK OPTIONS. With incentive stock options, employees receive the right to purchase a specified number of shares of company stock at a specified price during a specified period. ISOs are not taxable at the time of grant or at the time of exercise. Only when the stock is sold are the gains subject to federal taxation. Gains from incentive stock options will be taxed at an ordinary income tax rate. There is a cap on capital gain tax at 28%. Options may be exercised in any order. Also, an employer may not grant an employee more than $100,000 in stock options that first become exercisable in any one year.