Business Glossary

stock option granted employees under an option plan that provides a more favorable tax effect than qualified stock option . With incentive stock options, employees receive the right to purchase a specified number of shares of company stock at a specified price during a specified period. ISOs are not taxable at the time of grant or at the time of exercise. Only when the stock is sold are the gains subject to federal taxation. Gains from incentive stock options will be taxed at an ordinary income tax rate. There is a cap on capital gain tax at 28%. Options may be exercised in any order. Also, an employer may not grant an employee more than $100,000 in stock options that first become exercisable in any one year.

plan created by the Economic Recovery Tax Act of 1981 (ERTA) under which qualifying options are free of tax at the date of grant and the date of exercise. Profits on shares sold after being held at least two years from the date of grant or one year from the date of transfer to the employee are subject to favorable capital gains tax rates.

equity-type of compensation plan under which qualifying stock options are free of tax at the date of grant and the date of exercise but are taxed when sold.