Incentive stock options (ISOs) 101
ISOs are the tax-favoured option type available only to employees. Here is how they vest, exercise and qualify.
The basics
ISOs can only be granted to employees, must be exercised within ten years of grant, and generally must be exercised within 90 days of leaving unless your plan says otherwise. Vesting is typically four years with a one-year cliff.
The tax advantage
No ordinary income and no payroll tax at exercise. If you hold two years from grant and one year from exercise, the entire gain from strike to sale price is taxed at long-term capital gains rates.
The catch
The exercise spread is added to alternative minimum taxable income, so a large ISO exercise can generate a tax bill on paper gains you have not sold. Disqualifying dispositions — selling too early — convert the spread back into ordinary income.
Educational content, not tax advice. Your outcome depends on your grant documents, income and state. Equity Tax Engine models your actual position — join the waitlist.