Print This Page

Subject:   ISO vs NQSO
Date:   Wed, 4 Aug 1999
From:   Vikas

Hi,

I had a question regarding exercising the two kinds of options. Given the same exercise price, given that I exercise the options and sell the stock on the same day, what is the difference between the money that I'll see, taxes that I'll pay and anything else for that matter.

Thanks!

Vikas

Answer

Hello Vikas,

Thanks for writing.

Your question is very vague. But to get to the key issue, a same-day sale of an ISO has a very similar treatment to an NQSO. They both result in ordinary income.

Most employers do not withhold income taxes for the ordinary income from an ISO, but do for an NQSO.

Most employers are not withholding and paying employment taxes (FICA and Medicare) for ISOs, but are for NQSOs. A recent IRS Letter Ruling, 199926034, based on the Sun Microsystems Tax Court ruling, indicates that ISOs are subject to employment taxes, but the IRS is postponing enforcing withholding for ISOs exercised before 2003.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.