We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What are Incentive Stock Options?

Malcolm Tatum
By
Updated May 17, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Also known as ISOs, incentive stock options are opportunities to acquire shares of stock through an employer. Incentive share options of this type may come in the form of a retirement plan, or as part of a merit-based incentive that is earned by compliance with a proscribed set of standards. In the United States, incentive stock option plans sometimes come with tax benefits, depending on how the stock option program is configured.

Incentive stock options are one of several employee stock option offerings. Non-statuary stock option plans, as well as non-qualified stock option plans, do not carry the same tax benefits. At the same time, these types of stock option plans also provide less of an opportunity for earning a return, a factor that may be attractive to some employers as well as employees who tend to favor conservative investment schemes.

With incentive stock options, there is a greater degree of volatility involved, since the stocks included in the plan are likely to carry a higher rate of risk. In return for taking on this additional risk, the returns on the investment are usually higher. When coupled with the tax benefit, this type of option incentive has the capability to create a solid nest egg for the employee.

In the United States, the main tax benefit of incentive stock options is that ordinary income tax is not assessed on the difference between the fair market value of the acquired stock and the exercise price. Depending on the structure of the plan, the investor may have to pay a lower tax assessment, known as the alternative minimum tax. In return for this tax break, the holder must retain control of the shares for at least one calendar year from the date of exercise, and two years from the date that the shares are granted to the holder. If the shares are sold, any profit that is made by the sale of the shares will be subject to that lower alternative minimum tax.

The concept of incentive stock options is not unique to the United States. Over the years, companies based in the United Kingdom, France, Canada, and various Asian and South American countries have offered similar programs. Most of the models used around the world do include some type of tax benefit, such as deferring the assessment of taxes until the holder sells the shares and thus profits from the transaction.

In recent years, some companies have opted to expand the offering of incentive stock options from officers only, allowing salaried employees to also participate in the plan. This is particularly true when the incentives are used as a substitute for a pension or other form of retirement plan. Depending on the performance of the stocks involved, a plan of this type does exhibit the potential to provide a comfortable source of income during the retirement years.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.