Incentive Stock Option - ISO

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DEFINITION of 'Incentive Stock Option - ISO'

A type of employee stock option with a tax benefit, when you exercise, of not having to pay ordinary income tax. Instead, the options are taxed at a capital gains rate.

INVESTOPEDIA EXPLAINS 'Incentive Stock Option - ISO'

Although ISOs have more favorable tax treatment than non-qualified stock options (NSOs), they also require the holder to take on more risk by having to hold onto the stock for a longer period of time in order to receive the better tax treatment.

Also, numerous requirements must be met in order to qualify as an ISO.

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