A US-only employee stock option (Incentive Stock Option) that can qualify for lower long-term capital gains tax if you hold the shares long enough, in exchange for tighter rules and Alternative Minimum Tax exposure at exercise.
By default, ISOs convert to NSOs ninety days after an employee leaves. Pinterest, Coinbase, and Quora later extended that window to seven or ten years to keep ISO treatment, after years of pressure from early-employee advocates pointing out that strike prices at growing startups can run into six figures.
The two flavors of employee stock option in the US. They look the same on the offer letter, but the tax treatment splits them wide open.
| Aspect | ISO | NSO |
|---|---|---|
| Who can receive them | W-2 US employees only | Anyone: employees, contractors, advisors, board members |
| Tax at exercise | No regular income tax, but can trigger AMT | Ordinary income tax on the spread, automatically withheld |
| Tax at sale | Long-term capital gains if held 2 years post-grant and 1 year post-exercise | Long-term capital gains on any further appreciation |
| Common gotcha | AMT can hit hard at exercise even before any shares are sold | Withholding bill at exercise surprises first-time recipients |
| Annual grant cap | Only $100K worth per year vests as ISO; the rest spills to NSO | No cap |