ISO vs NSO: what's the difference?

Both are US stock options, but they're taxed very differently. Which you hold changes what you owe when you exercise and sell — and how to plan around it. New to options? Start with how employee stock options work.

The short version

ISOs can qualify for favourable long-term capital-gains tax if you meet holding periods, but may trigger AMT when you exercise. NSOs are simpler — the spread is taxed as ordinary income at exercise, no AMT quirk, but no special rate on that spread either.

Side by side

	ISO	NSO
Who can get them	Employees only	Anyone (employees, contractors, advisers)
Tax at exercise	No regular income tax, but spread counts for AMT	Spread taxed as ordinary income
Tax at sale	All capital gains if holding periods met	Capital gains only on growth after exercise
Best-case rate	Long-term capital gains on the whole gain	Ordinary income on the spread, then capital gains
Main catch	AMT surprise at exercise	Higher tax on the exercise spread

Simplified; your situation and current thresholds decide the actual outcome.

What it means when you sell

With ISOs, timing a sale to hit the qualifying holding periods can meaningfully cut your tax — sometimes worth waiting for. With NSOs, you've already paid income tax on the spread at exercise, so a later sale only taxes the additional growth. Either way, model the exercise cost first with the AMT calculator.

Frequently asked questions

Are ISOs better than NSOs?

Potentially, on tax: ISOs can make your entire gain long-term capital gains if you meet the holding periods, versus NSOs taxing the exercise spread as ordinary income. But ISOs can trigger AMT at exercise, adding complexity and a possible upfront bill. Which is 'better' depends on your numbers and whether you can meet ISO holding rules.

Do NSOs trigger AMT?

No. The AMT issue is specific to ISOs, where the exercise spread is added to the alternative minimum tax calculation. NSOs are instead taxed as ordinary income at exercise, with no AMT quirk.

Can I choose whether I get ISOs or NSOs?

Usually not — it's set by your grant and tax rules. ISOs are limited to employees and subject to annual limits; amounts above those, and grants to non-employees, are NSOs. Check your grant agreement to see which you hold.

Get the numbers before you decide

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