ISO vs NSO Tax Treatment 2027 Comparison Calculator
ISOs (Incentive Stock Options) offer long-term capital gains treatment but trigger AMT. NSOs (Non-Qualified Stock Options) are taxed as ordinary income at exercise but have simpler treatment. The choice often dictates tens of thousands in lifetime tax.
| ISO PATH | |
| Ordinary Income (disqualifying only) | — |
| AMT Cash Upfront (qualifying) | — |
| Capital Gains Tax at Sale | — |
| ISO Total Tax | — |
| ISO Net Proceeds | — |
| NSO PATH | |
| Ordinary Income Tax at Exercise | — |
| Capital Gains Tax at Sale | — |
| NSO Total Tax | — |
| NSO Net Proceeds | — |
ISOs and NSOs share one thing — both let you buy company shares at a discount. Everything else differs. ISOs offer favorable long-term capital gains treatment IF you hold 2 years from grant and 1 year from exercise, but trigger AMT. NSOs are taxed as ordinary W-2 income at exercise (no AMT), then capital gains on subsequent sale. The right choice depends on your tax bracket, AMT exposure, holding ability, and cash flow.
How ISOs Are Taxed in 2027
At exercise: no regular tax, but the bargain element (FMV - strike) is added to AMT income. If AMT exceeds regular tax, you owe the difference in cash. At qualifying sale (2 years from grant + 1 year from exercise): entire gain (sale - strike) is long-term capital gains, top federal rate 20% + 3.8% NIIT + state. At disqualifying sale: bargain element becomes ordinary W-2 income; gain above FMV at exercise is short or long-term capital gain depending on holding period.
How NSOs Are Taxed in 2027
At exercise: the bargain element is ordinary W-2 income subject to federal income tax, FICA (Social Security up to wage base, Medicare 1.45% + 0.9% additional), and state tax. The company withholds at supplemental rate. At subsequent sale: gain above FMV at exercise is capital gains — long-term if held 1+ year from exercise, short-term otherwise. Simpler accounting, no AMT exposure.
When ISOs Win vs When NSOs Win
ISOs typically win for senior employees who: (1) can fund the AMT cash burden, (2) plan to hold long enough for qualifying disposition, (3) expect significant post-exercise appreciation, (4) have AMT credit utilization capacity over coming years. NSOs win when: (1) cash flow doesn't support AMT, (2) you plan to sell quickly, (3) you're already in AMT from other sources, (4) you don't want to track the bifurcated holding clock.
Last updated May 2026. Sources: IRS Form 3921 — Exercise of an Incentive Stock Option, IRS Pub 525 — Stock Options