ISO vs NSO: Incentive type comparison

If you've been granted stock options, they're likely one of two types: incentive stock options (ISOs) or non-qualified stock options (NSOs).

At a basic level, they work the same way, giving you the right to buy company shares at a set price. But the type you hold changes how you're taxed and what rules apply when you exercise or leave your job.

This guide walks you through the main differences, so you can figure out which one you have and what it means for your money.

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What are ISOs?

Incentive stock options (ISOs) are a type of stock option that companies can give only to employees.

Their main draw is tax treatment. You owe no regular income tax when you exercise them, and if you hold the shares long enough, your eventual gain can be taxed at lower long-term capital gains rates.¹

In exchange for those advantages, ISOs come with more rules attached, which we'll get into below.

What are NSOs?

Non-qualified stock options (NSOs) are the more flexible type. Companies can grant them to employees, but also to contractors, advisors, and board members.

The trade-off for that flexibility is simpler but less favorable tax treatment. When you exercise NSOs, the difference between your strike price and the share value is taxed as ordinary income right away.

There's no special tax status to qualify for and no holding rules to track, which makes them more predictable to plan around.

ISO vs NSO: What are the differences between them?

Both ISOs and NSOs give you the right to buy company shares at a fixed price, and both usually vest over time. The differences come down to who can receive them, how and when they're taxed, and the conditions attached to each.

Here's how they compare:

Who can receive them

ISOs are reserved for employees, so contractors, advisors, and board members can't receive them. NSOs have no such limit and can go to anyone the company chooses to grant them to.¹

If you're not a salaried employee, any options you hold are almost certainly NSOs.

When you get taxed

Both ISOs and NSOs can be taxed at exercise and again at sale, but the exercise is where they're different.

With NSOs, exercising is a taxable event, and the gain is taxed as ordinary income that year. With ISOs, there's no regular income tax at exercise, but the gain can feed into a separate calculation called the alternative minimum tax (AMT).¹

Annual limits and eligibility rules

ISOs carry conditions that NSOs don't.

The main one is a cap: you can't receive more than 100,000 USD worth of ISOs that first become exercisable in a single calendar year, and anything above that is treated as an NSO.¹

ISOs also have to meet a set of IRS conditions to keep their tax status.

NSOs come with none of these limits, which is part of why they're simpler.

What happens if you leave the company

When you leave a job, you typically have about 90 days to exercise your vested options before they expire.² This is true for both ISOs and NSOs.

For ISOs specifically, that 90-day mark also affects your tax status: if you don't exercise within the window, your ISOs either expire or convert into NSOs and lose their tax advantages.

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ISO vs NSO: Tax treatment in the US

Tax is the biggest practical difference between ISOs and NSOs. Let's take a closer look at how each one works when you exercise and when you sell.

NSO tax rules

When you exercise, the gap between your strike price and the share value is taxed as ordinary income. That's the same category as your salary, and payroll taxes apply.

When you later sell the shares, any further gain from that point is taxed as a capital gain, **at the lower long-term rate if you've held the shares for more than a year.**¹³

ISO tax rules

ISOs can save you tax, but they ask more of you in return. Exercising ISOs triggers no regular income tax, which is their main advantage.

The catch is that the gain can count toward the alternative minimum tax (AMT), a parallel calculation that can create a bill even though you haven't sold any shares.¹

If you then hold the shares long enough, your gain can qualify for long-term capital gains rates. But to get there with ISOs, you need to hold the shares at least 2 years from the grant date and 1 year from exercise. ¹

NSOs vs ISOs tax implications

NSOs are predictable and taxed as you go. In turn, ISOs offer a lower tax bill if you can meet the holding rules and manage the AMT.

Because a large exercise of either type can involve a significant amount of money, it's a good idea to check with a tax advisor before you do anything with your stock options.

FAQs

Are ISO and NSO the same?

No. They're both stock options that let you buy company shares at a set price, but they're different in who can receive them and how they're taxed.

ISOs go only to employees and can qualify for lower tax rates if you meet certain holding rules. NSOs can go to a wider group and are taxed as ordinary income when you exercise.

Do employees get ISOs or NSOs?

Employees can receive either or both ISOs and NSOs. ISOs are limited to employees, so if you're a contractor, advisor, or board member, your options are definitely NSOs. If you're not sure which options you hold, check your grant paperwork.

How are NSO options taxed?

NSOs are taxed at two points. When you exercise, the gap between your strike price and the share value is taxed as ordinary income. When you sell, any gain after that is taxed as a capital gain, with the rate depending on how long you held the shares.

How do I know if my options are ISO or NSO?

Your grant agreement will say which type you have, so start by looking there. If it isn't clear, your equity plan administrator or HR team can confirm it. As a rule of thumb, if you're not an employee, your options are NSOs.

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ISOs and NSOs both give you a stake in the company you work for, but they are governed by different rules, including when it comes to taxes.

ISOs can lower your tax bill if you meet the holding rules and plan around the AMT. However, make sure to talk to a tax advisor before you make any decisions.

If you sell your shares and want to move the proceeds to another country (for example, if you're relocating), banks often take a cut through transfer fees and exchange rate markups.

These costs grow with larger amounts, but Wise can help you save.

Learn more about Wise

Sources

1. Carta - How stock options are taxed
2. Carta - Post-termination exercise period (PTEP)
3. SmartAsset - ISOs vs NSOs

Sources checked 09/17/2026