ISO vs NSO Tax Calculator

Incentive Stock Options (ISO) qualify for special tax treatment under IRC §422 — no ordinary tax at exercise (only AMT preference), and long-term capital gains rates if held 2 years from grant + 1 year from exercise. Non-Qualified Stock Options (NSO) trigger ordinary income tax on the bargain element at exercise, plus capital gains on subsequent appreciation. Source: IRS Pub 525, IRC §422.

ISO Qualifying Disposition Rules

To get ISO's preferred tax treatment, you must hold the stock for at least: (a) 2 years from the date the option was granted, AND (b) 1 year from the date of exercise. If both conditions are met (qualifying disposition), the entire gain (sale price - strike) is taxed at long-term capital gains rates. If either condition fails (disqualifying disposition), the bargain element converts to ordinary income — essentially NSO treatment.

The AMT Trap

At exercise, the ISO bargain element is a "preference item" for Alternative Minimum Tax (AMT). For 2026, AMT exemption is $85,700 single / $133,300 MFJ. Above the exemption, AMT rate is 28% on the spread. Large ISO exercises can trigger five- or six-figure AMT bills in the exercise year — without selling the stock. Strategy: exercise early in the year, leaving 11+ months to sell if AMT is unaffordable, or stagger exercises across multiple years to stay under exemption.

NSO Calculation

NSO bargain element (FMV at exercise minus strike) is taxed as ordinary income at exercise, subject to federal income, state, FICA (employer also pays). On subsequent sale, additional gain or loss is short-term (held under 1 year) or long-term capital gain. NSOs are simpler — no qualifying period, no AMT — but tax bill is larger up-front.

Last updated May 2026. Sources: IRS — ISO Tax Rules (§422), IRS Pub 525.