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Non-Qualified Stock Options – What Are They and What Do They Mean?

Non-Qualified Stock Options – What Are They and What Do They Mean?

Photo Credit: David Paul Ohmer

As we all know, stock options, are awarded to certain company employees who in turn have the option to (but are not forced to) buy stock in the company for a set price.

So, what are non-qualified stock options and how do they differ from Incentive stock options? Non-qualified stock options are simpler than qualified stock options in that they do not meet all the Internal Revenue Code requirements. With this kind of stock, the employee pays income tax on the difference of the grant price and the fair market value or sale price on the date of exercise.

There are, however, other differences between these two types of stock. The website Diff En has a great comparison chart to clear up all the differences on non-qualified stock options. For instance, a non-qualified stock option can be granted to anyone, not just a company’s employee.

A benefit of this stock is that they can be exercised at any time, after they have vested and before the expiration date – usually 7 -10 years after grant. Another benefit is that they don’t need to be held for a certain period of time because they do not qualify for long-term capital gains but are taxed as ordinary income on the date of exercise.

An additional aspect to consider with non-qualified stock options is the value of the stock. The Diff En website explains that in the case of a qualified stock “The aggregate fair market value (determined as of the grant date) of stock bought by exercising Incentive Stock Options that are exercisable cannot exceed $100,000 in a calendar year.” This is opposed to a non-qualified stock, which simply has no limit on the value.

This short video also points out other major differences;, one of them being the difference in taxation between non-qualified stock and incentive stock options.

So there you have it! If you have any questions regarding the best options for you or your organization, Stock Connections is glad to help. Just give us a call.

Photo Credit: David Paul Ohmer

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