What Are Stock Options? And Do You Want Them?

The ins and outs of income tax
When an employer grants an ISO to an employee, no income tax is recognized at that time. The exercise of the ISO by the employee is not an income tax event for the regular income tax either. However, the spread between the strike price and fair market value of the stock at the date of exercise is a tax preference item for alternative minimum tax purposes and can create an alternative minimum tax liability. If the alternative minimum tax does not apply, and the ISO holding period rules are met, only when the employee sells the stock acquired by the exercise of the ISO will an income tax be triggered. The tax will be on the difference between the strike price and the sale price. An example of the ISO rules is as follows.