As motivating force, incentive stock options (ISO) are a type of corporate remuneration presented only to employees that grant them the right to purchase company stock in the future at a foreordained price. ISOs are also tax efficient since gains are taxed at lower capital gains rates instead of at the employee’s higher marginal tax rates. Â
Privately-owned businesses and public companies utilize ISOs to boost executive pay, create a sense of ownership in the company and to retain employees. ISOs are usually given to new key employees in new businesses or to exceptional performers within the organization to allow them to participate in the company’s success.
ISOs permit a person to purchase company stock at a set price (strike price) for a particular timeframe. For instance, a worker might be issued ISOs with a strike price of $50 and a two-year period to exercise. If the company’s stock increases to $75, the worker can exercise the option and make a gain of $25 per share.
ISOs need to vest before a representative can buy shares, a legal term that means to acquire the right to the option. Once an ISO vests it can be exercised by the employee. To gain favorable cap gain tax treatment you should wait at least one year from the exercise date and two years from the grant date to sell your acquired company stock shares. This will qualify the gains as long-term capital gains for tax purposes. A good financial planning consultant will monitor your positions and help you time the execution of the exercise and subsequent stock sale. Â
Important Disclosure
This blog is for informational purposes only and not to be misinterpreted as personalized advice or a recommendation for any specific investment product, strategy, or financial decision. This article does not contain sufficient information to support a financial or investment decision. If you have questions about your personal situation, consider speaking with a financial or tax advisor.
