Non-qualified stock option
Encyclopedia
Non-qualified stock options are stock options which do not qualify for the special treatment accorded to incentive stock options.
Incentive stock options are only available for employees and other restrictions apply for them. For regular tax purposes, incentive stock options have the advantage that no income is reported when the option is exercised and, if certain requirements are met, the entire gain when the stock is sold is taxed as long-term capital gains.
In contrast, non-qualified stock options result in additional taxable income to the recipient at the time that they are exercised, the amount being the difference between the exercise price and the market value on that date.
Non-qualified stock options are frequently preferred by employers because the issuer is allowed to take a tax deduction equal to the amount the recipient is required to include in his or her income.
If they have deferred vesting, then taxpayers must comply with special rules for all types of deferred compensation Congress enacted in 2004 in the wake of the Enron scandal
known as Section 409A of the Internal Revenue Code
.
Incentive stock options are only available for employees and other restrictions apply for them. For regular tax purposes, incentive stock options have the advantage that no income is reported when the option is exercised and, if certain requirements are met, the entire gain when the stock is sold is taxed as long-term capital gains.
In contrast, non-qualified stock options result in additional taxable income to the recipient at the time that they are exercised, the amount being the difference between the exercise price and the market value on that date.
Non-qualified stock options are frequently preferred by employers because the issuer is allowed to take a tax deduction equal to the amount the recipient is required to include in his or her income.
If they have deferred vesting, then taxpayers must comply with special rules for all types of deferred compensation Congress enacted in 2004 in the wake of the Enron scandal
Enron scandal
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world...
known as Section 409A of the Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
.