• A non-qualified stock option (NQSO) is any option other than an incentive stock option.
  • Non-qualified stock options have greater flexibility than incentive stock options in a number of ways.
    1. Shareholders approval is not required.
    2. There is far greater flexibility for the employer to grant the options as to terms of the grant, vesting and period over which they may be exercised (e.g. no limits on the annual value of the grant or any requirement that the option be out of the money at the grant date).
    3. There is greater flexibility as to whom the option may be granted: an employee, independent contractor as well as any family members of the foregoing.
    4. There are more transferability options for holders of NQSOs.

Tax Implications

  • Grant - no taxable event is triggered when options are granted as the strike price and market price are nearly identical.
  • Exercise - to the extent that the option is in the money, that amount is deemed W-2 income and subject to payroll tax.
  • Basis - after exercise, the strike price plus the in-the-money amount serve as the basis in the shares for the computation of any capital gains.
  • Sale (disposition) - there are two options here:
    1. The sale of shares results in a capital gain/loss, depending upon whether or not the option is in the money.
    2. The holding period determines whether the capital gain is long- or short-term.

Transferability of NQSOs

Related Articles
  1. Managing Wealth

    Get The Most Out Of Employee Stock Options

    These plans can be lucrative for employees - if they know how to avoid unnecessary taxes.
  2. Trading

    Should Employees Be Compensated With Stock Options?

    Learn the good, the bad and the ugly sides of this type of payout.
  3. Trading

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  4. Trading

    The Benefits And Value Of Stock Options

    The pros and cons of corporate stock options have been debated since the incentive was created. Learn more about stock option basics and the cost of stock options.
  5. Trading

    4 Reasons To Hold Onto An Option

    There are times when an investor shouldn't exercise an option. Find out when to hold and when to fold.
  6. Trading

    Stock Options: What's Price Got To Do With It?

    A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price.
  7. Trading

    Dividends, Interest Rates And Their Effect On Stock Options

    Learn how analyzing these variables are crucial to knowing when to exercise early.
  8. Trading

    Exploring European Options

    The ability to exercise only on the expiration date is what sets these options apart.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center