Taxation of Stock Options

Taxation of stock options involves paying taxes when you acquire or sell the shares. For non-qualified stock options (NSOs), you are taxed as ordinary income at exercise based on the difference between the market price and the option's strike price. For incentive stock options (ISOs), no tax is due at exercise, but if you sell the shares later (a qualifying sale), you may benefit from favorable tax treatment; if not, it can trigger alternative minimum tax (AMT). When you sell the shares, any additional gain is taxed as capital gains—short-term if held less than a year, or long-term if held longer.