Incentive Stock Options ("ISOs")
Incentive stock options are rights granted by your company to purchase shares of the corporations stock at a fixed price for a specified period of time. They are stock options which are qualified under the Internal Revenue Code. Consequently, the holders of ISOs will experience highly favorable tax treatment, including the possibility of avoiding the payment of taxes associated with the ISOs through vehicles such as an Accelerated Charitable Trust.
ISOs are only subject to taxation in the year that the stock resulting from their exercise is sold. The amount of income realized is equal to the difference between your exercise price and the fair market value of the underlying stock at the time of the stocks sale (your taxable element). The taxable element is taxed as ordinary income or capital gain income depending on the holding period of the stock.