Incentive Stock Option

An Incentive Stock Option (ISO) is the tax-advantaged stock option granted only to employees under IRC Section 422. It produces no ordinary-income tax at exercise (subject to AMT) and qualifies for long-term capital-gains treatment on the entire spread if held two years from grant and one year from exercise, capped at $100,000 of FMV first-exercisable per employee per year. It is the more tax-favored of the two main option types and the default for employee grants at most C-corp startups.

The ISO mechanic and the tax rules:

• Grant: company grants ISO with strike price equal to fair market value at grant (per 409A valuation), to an employee (W-2, not 1099 contractor or board member), with vesting and expiration terms.
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