qualified or non qualified ISO?
Qualified Incentive Stock Options
An ISO that is "qualified" allows you to escape personal taxation of any profit made in the exercising and subsequent sale of the ISOs. This comes in the form of two separate tax savings. At the point the option is exercised, you are exempt from paying tax on the gain between the option-grant price -- when the option was issued -- and the time-of-exercise value of the stock. Secondly, at the time you sell the stock, the profit on the sale qualifies for taxation as a long-term capital gain, usually a lower rate than personal income.
Non-Qualified Incentive Stock Options.
Incentive stock options disqualified from tax savings may take a double hit. The spread between issue and exercise prices is taxed at your regular income rate in the year of exercising. For example, an option for 100 shares at $20 per share will cost you $2,000 to exercise. If stock currently trades at $25 a share, you are taxed on the $500 spread as though it were income. The same is true if you sell your stock within a year of exercising. Twelve months after the date of exercising it becomes taxed as a capital gain.
