What Are Stock Options? And Do You Want Them?

Three years later on Nov. 30, 2007, Rachel sells the 100 shares of X stock for $25 per share. The difference between the $2,500 sale price and the $1,000 tax basis is long-term capital gain because Rachel held X stock for more than one year after the exercise of the ISO. But as noted in the next section, simply holding the stock for one year is no guarantee of capital gain treatment; ISOs cannot be transferred by the employee to any other individual or to a charity other than by a will, or pursuant to the laws of descent and distribution. Thus ISOs cannot be used to make lifetime charitable gifts. An ISO that passes at the death of the employee continues to be treated as an ISO in the hands of the beneficiary, including if the beneficiary is a charity. However, because a charitable beneficiary is a tax-exempt entity, the income tax advantages of an ISO could be lost. For this reason, donors may be well advised to use ISOs for non-charitable purposes and fund charitable gifts with other assets.