Options Book Learn how to get the most from your stock options or other equity compensation. The plain language tax guide for everyone who buys and sells stocks, mutual funds and stock options, from beginners to trading professionals. They aren't as widely used as nonqualified stock options, but their popularity is growing.
Nonqualified options have two disadvantages compared to incentive stock options.
One is that you have to report taxable income at the time you exercise the option to buy stock, and the other is that the income is treated as compensation, which is taxed at higher rates than long-term capital gains. Incentive stock options provide a way to avoid both of those disadvantages. And if you hold the stock long enough to satisfy a special holding period, your gain from the stock will be treated as long-term capital gain. How You Get Them Incentive stock options must be granted pursuant to a stock option plan that was adopted by the company's board of directors and approved by the shareholders. In some cases options are granted according to a formula.