By Maria Kelly, CFP® & Phil Matalucci, CFP® | March 2026
In Part 2 of our equity compensation series, Amplius team members Maria Kelly, CFP® and Phil Matalucci, CFP® dig into stock options — the contracts that give you the right to buy company shares at a preset price down the road. Both Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) typically vest over multiple years and come with a 10-year expiration window, but how they’re taxed is where the real planning begins.
Key Takeaways from Part 2 of Our Equity Compensation Series
1. ISOs vs. NSOs: Taxation Is the Core Difference
Both ISOs and NSOs are contracts giving you the right to buy company shares at a preset price, and neither is taxed at grant. The difference comes down to how the IRS treats your profit when you exercise and sell — and that distinction can mean tens of thousands of dollars depending on your situation.
2. NSOs: Simpler, but Less Tax-Efficient
When you exercise NSOs, the profit (the spread between your grant price and the current share price) is taxed as ordinary income — and it’s also subject to Social Security and Medicare taxes. Depending on your bracket, that could be as high as 37%. If you sell immediately at exercise, there’s typically no additional tax owed beyond that. If you hold, any future appreciation is subject to short- or long-term capital gains. Because NSOs are always taxed at ordinary income rates at exercise, they tend to be less tax-efficient than ISOs — which is why timing and existing exposure should both factor into your decision.
3. ISOs: Two Holding Periods Unlock Long-Term Capital Gains
ISOs come with a major potential tax advantage — but only if you satisfy two specific holding periods: two years from the grant date and one year from the exercise date. Meet both, and your entire profit is taxed at long-term capital gains rates. Miss either one, and you trigger a “disqualifying disposition” — the spread between your grant price and sale price is taxed as ordinary income, and that tax advantage disappears.
4. The AMT Wrinkle — Unique to ISOs
Exercising ISOs and holding the shares isn’t a regular taxable event — but it can trigger the Alternative Minimum Tax (AMT). Even though you haven’t sold anything, the IRS looks at the paper gain (the difference between your grant price and the current price) and may apply AMT. Think of it as a prepayment on taxes: if you eventually sell those shares as long-term capital gains, you can often claim an AMT credit. Avoiding or minimizing AMT requires careful planning — and in some cases, paying the AMT is actually the right call because of that future credit.
5. Strategy Beyond “Sell or Hold”
Whether you have ISOs, NSOs, or both, the decision isn’t just about exercising and selling versus holding. It’s about how those shares fit into your broader financial picture: your concentration in company stock, your tax bracket today versus expected tomorrow, your liquidity needs, and any future grants on the horizon.
Why It Matters
“Even a small decision, or what may seem like a small decision, could have a huge tax impact that you were not expecting.” — Maria Kelly, CFP®
Stock options can be a powerful wealth-building tool — but the wrong move at the wrong time can create an unexpected tax bill that wipes out a meaningful chunk of the upside. ISOs in particular reward patience and planning; NSOs reward awareness of where they fit in your overall picture.
This is Part 2 of a three-part series. Part 1 covered RSAs and RSUs. Part 3 will cover Employee Stock Purchase Plans (ESPPs).
Frequently Asked Questions: ISOs, NSOs, and Stock Options
Q: What’s the main difference between an ISO and an NSO?
A: The biggest difference is how they’re taxed. NSOs are taxed at ordinary income rates on the spread when you exercise. ISOs, if you meet two specific holding periods, can be taxed entirely at long-term capital gains rates — a meaningful advantage. Amplius Wealth Advisors helps clients understand exactly which type they hold and how to plan accordingly.
Q: When are stock options taxed?
A: Neither ISOs nor NSOs are taxed when they’re granted to you. NSOs are taxed at exercise, when the spread is treated as ordinary income (subject to Social Security and Medicare). ISOs aren’t taxed in the regular sense at exercise, but they may trigger Alternative Minimum Tax if you exercise and hold.
Q: What are the two holding periods for ISOs?
Q: What is the Alternative Minimum Tax (AMT), and why does it apply to ISOs?
Q: Should I exercise my stock options as soon as they vest?
A: There’s no universal answer. The right approach depends on your tax bracket, your concentration in company stock, your cash needs, and your outlook on the company. That’s why a sound strategy — not a default action — is what matters most.