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Non-qualified stock option

Non-qualified stock option

Non-qualified stock options (NSO or NQO) are a type of stock option which can be granted to both employees or consultants. NSOs have potentially different tax implications from their alternative incentivized stock options (ISOs). 

An NSO is offered to employees as a part of a benefit package. Employees are given the option to purchase stocks of the company at a specific price during a specific time. The employee receives these stock options on the grant date, which usually expires ten years from the grant date. Recipients of NSOs need to exercise them prior to the grant date or they will lose the stock options. There are various ways to exercise the NSOs, such as waiting until they are about to expire, exercising them when the stock price is high, or exercising them when they are at a moderate value. 

Taxes

Recipients of NSOs are presented a tax bill when they go to exercise them. The taxed amount is how much value has been gained between the grant date and the exercise date, not the total value of the NSOs. If recipients hold their stocks for more than a year, they will be taxed as long-term capital gains. If it is for less than a year, they will be taxed as short-term capital gains. The employer must report the stock options on an employee's W2 form in the same year that they employee exercises the NSOs.



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Further reading

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Incentive Stock Option Plans – ISOs vs. NQOs

Trent Dykes, Tyler Hollenbeck





Incentive Stock Options vs. Nonqualified Stock Options

Joe Wallin





Documentaries, videos and podcasts

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What is NON-QUALIFIED STOCK OPTION? What does NON-QUALIFIED STOCK OPTION mean?



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