Tax & Compliance
ISOs vs NSOs: Structuring Option Grants
Collated by Aparna Devalla, CPA
Curated by Rubric Financial
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What ISOs and NSOs Are
- Incentive Stock Options (ISOs) are tax-advantaged options available only to employees — they receive favorable capital gains treatment if holding period requirements are met
- Non-Qualified Stock Options (NSOs) can be granted to anyone (employees, contractors, advisors, board members) but the spread at exercise is taxed as ordinary income
- Both give the holder the right to purchase company stock at a fixed exercise price (the 409A fair market value at grant date)
- The choice between ISOs and NSOs affects both the company's payroll tax obligations and the recipient's individual tax treatment
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