NSO (Non-Qualified Stock Option)
What is an NSO? Non-Qualified Stock Options Explained
An NSO is a US stock option without special tax treatment. At exercise, the spread is taxed as ordinary income immediately (reported on W-2). NSOs can be granted to anyone: employees, contractors, consultants, advisors, board members.
NSOs are simpler than ISOs: no AMT complications, no holding period requirements, no annual limit. The tradeoff is ordinary income tax rates at exercise, which are higher than capital gains rates.
Companies often prefer NSOs because they get a tax deduction equal to the employee's ordinary income at exercise. For employees: exercise NSOs and you'll owe tax on the spread right away. Plan accordingly.
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