Incentive Stock Options ISO Defined   Incentive Stock Option means a special stock option granted to employees of a company as part of their compensation that has certain tax advantages.

ISO Rules   In general, there is no tax under the regular tax system upon receipt of an Incentive Stock Option or upon exercise of the option (converting the option into shares of stock). The Employee does not pay regular income tax until the stock is sold or transferred.

Tax Consequences   If the stock is sold more than two years after the Incentive Stock Option is granted and one year after the Incentive Stock Option is exercised (the employee has held the actual stock for one year or longer), the employee receives the preferential long-term capital gains rate on the sale of the stock.

Vesting   Most companies require that employees work for a requisite period or meet certain performance goals before they are eligible for Incentive Stock Options. Once those requirements are satisfied, the options become "vested," regardless of whether or not he or she chooses to exercise any options.

For additional information on Incentive Stock Options and employee stock options in general, please see the Tax Prophet's section  Employee Stock Options..

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