Business Dictionary
Incentive Stock Option (ISO)
An
Option that has met certain tax requirements entitling the optionee to favorable tax treatment. Such an option is free from
regular tax at the date of grant and the date of
exercise (when a non-qualified option would become taxable). If two
holding period tests are met (two years between grant date and
sale date and one year between the exercise date and sale date), the
profit on the option qualifies as a long
term capital gain rather than ordinary income. If the holding periods are not met, there has been a "disqualifying
disposition".
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