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What is a Qualified Stock Option? A qualified stock option confers special tax benefits on the employees of a corporation. This stock option is not reportable as taxable income to the employee at the time of grant, nor when the employee later exercises the option to buy stock.
Sell-to-Cover Difference between the FMV at exercise and the grant price is taxed as ordinary income and subject to federal, state and local income taxes in addition to payroll taxes. For received net shares, difference between the FMV at exercise and sale price is taxed as a long-term capital gain or loss.
If minimizing ordinary income tax is your priority, you should focus on meeting the requirements for a qualifying disposition. This means that you have to wait for a minimum of two years from the ISO grant date and at least a year from the exercise date before you sell your ISO shares.
Incentive stock options, or ISOs, are options that are entitled to potentially favorable federal tax treatment. Stock options that are not ISOs are usually referred to as nonqualified stock options or NQOs. The acronym NSO is also used. These do not qualify for special tax treatment.
Non-qualified stock options (NSOs) are a type of stock option that does not qualify for favorable tax treatment for the employee. Unlike with incentive stock options (ISOs), where you dont pay taxes upon exercise, with NSOs you pay taxes both when you exercise the option (purchase shares) and sell those shares.

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The minimum NSO exercise withholding requirement is only 22% for up to $1 million in spread value (37% if over $1 million). Many companies try to estimate the right amount but it isnt very easy. Companies are required to withhold NSO taxes only for employees.
Your employer is not required to withhold income tax when you exercise an Incentive Stock Option since there is no tax due (under the regular tax system) until you sell the stock.
ISOs only apply while you are still employed at the company that issued the grant and cannot be extended beyond 90 days after you leave. NSOs dont require employment and can be extended well beyond 90 days.
Profits made from exercising qualified stock options (QSO) are taxed at the capital gains tax rate (typically 15%), which is lower than the rate at which ordinary income is taxed. Gains from non-qualified stock options (NQSO) are considered ordinary income and are therefore not eligible for the tax break.
You will receive the net proceeds in cash after option exercise costs, taxes, commissions and fees. You may use the proceeds from the stock sale to cover the purchase price, tax withholding and additional fees.

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