Module
NSOs
5 min read
What NSOs are
Non-qualified Stock Options. Same mechanic as ISOs (right to buy at a strike price), different tax treatment. NSOs can be granted to anyone: employees, directors, contractors, advisors.
The tax shape
At exercise: the spread between FMV and strike is taxed as ordinary income, like salary. The company will usually withhold taxes through payroll. At sale: any gain above the FMV-at-exercise is capital gains. Long-term if held more than 1 year from exercise.
ISOs vs NSOs at a glance
ISOs: employees only, friendlier tax if you hit the holding periods, AMT risk. NSOs: anyone eligible, ordinary income at exercise, no AMT, no $100K limit. Many people end up with both because of the $100K ISO cap.
Early exercise
Some companies let you exercise options before they vest. If you do, file an 83(b) election within 30 days of exercise to be taxed at today's (low) FMV. The clock for long-term capital gains starts at exercise. The risk: if you leave before the unvested shares vest, you lose them, and the tax you paid doesn't come back.
Educational only. Not tax, legal, or financial advice. Talk to a qualified advisor.