Statutory Stock Option

DEFINITION of 'Statutory Stock Option'

Also known as incentive stock options, this type of employee stock option gives participants an additional tax advantage that unqualified or non-statutory stock options do not. Statutory stock options require a plan document that clearly outlines how many options are to be given to which employees, and those employees must exercise their options within 10 years of receiving them.

Furthermore, the option exercise price cannot be less than the market price of the stock at the time the option was granted. Statutory stock options cannot be sold until at least a year after the exercise date and two years after the date the option was granted.

BREAKING DOWN 'Statutory Stock Option'

The taxation of statutory stock options can be somewhat complicated. Exercise of statutory stock options will not result in immediate declarable taxable income to the employee (one of the chief advantages of this type of option.) Capital gains tax is then paid on the difference between the exercise and sale price. This type of option is also considered one of the preference items for the alternative minimum tax.