incentive stock option

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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incentive stock option

An option that permits an employee to purchase shares of the employer's stock at a predetermined price. No tax is due on any gain until the time of sale if the sale date is at least one year subsequent to the date on which the option was granted. Also called employee stock option, option.