Incentive Stock Option Law and Legal Definition
An Incentive Stock Option (ISO) is a type of stock option that allows favorable tax treatment to the stock option holder. They are a type of employee stock option that can be granted only to employees and confer a U.S. tax benefit. The main tax benefits of incentive stock options are that the incentive stock option holder can: delay his or her personal taxable event until the stock is actually sold by the holder (instead of at the exercise of the option), and receive long-term capital gains treatment for taxable gain at the stock sale (instead of ordinary income tax rates). In order to receive the tax benefits of an ISO, the company and incentive stock option holder must comply with various rules. ISOs are also referred to as incentive share options or qualified stock options by IRS.