<topic sku="core" tNum="254652" author="sallyh" xmlns="x-schema:hhTopicSchema.xml"><index><title>Learn about employee stock option grants</title><category>investing</category><klink type="cncpt">Tell me employee about stock option grants</klink></index>
<content>
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<p>Many corporations issue stock option grants as part of compensation packages. An option is the right to purchase stock at a given price. Employees are granted options to purchase a certain number of shares a a <glossary>strike price</glossary><mdash/>generally the market price of the stock on a specified date. After the employee works at the company for a certain period of time, the options become <glossary tNum="287113">vested</glossary>, meaning they can be <glossary tNum="286994">exercised</glossary>. If the price of the stock has gone up, the employee can buy them at the lower strike price and either continue to hold them or sell them at a profit. Stock option grants generally have an <glossary tNum="286995">expiration</glossary> date by which you must exercise them or forfeit the option.</p>
<p>The tax treatment of your stock options depends on their type:</p>
<ul>
<li><emph>Non-qualified stock options (NQSO).</emph> Corporations grant NQSOs to employees as a form of compensation. No tax is due when the options are granted. The employees can purchase a certain number of shares at a stated price within a specified period of time. Gains from exercising these options are taxed as ordinary income in the tax year the employee exercises them.</li>
<li><emph>Incentive stock options (ISO).</emph> Corporations generally grant ISOs to executive-level employees. The employees pay no income tax either at the time of the stock grant or at the time the option is exercised. If the employee sells the stocks within two years of the grant date or one year of exercising the options, the gains are taxed as ordinary income. Otherwise, gains are taxed at the lower capital gains rates. There is a $100,000 per employee limit on the value of stock covered by options that are exercisable in any calendar year.</li>
