---
title: "What Is incentive stock option? | Seek First Glossary"
description: "An incentive stock option, or ISO, lets an employee buy company stock at a set price. It has special tax rules, and exercising it can trigger the alternative..."
url: https://seekfirst.multisites.ai/glossary/incentive-stock-option
publisher: Seek First
phone: +1-866-398-4044
contact: https://seekfirst.multisites.ai/contact
---

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Equity compensation

# incentive stock option

An incentive stock option, or ISO, lets an employee buy company stock at a set price. It has special tax rules, and exercising it can trigger the alternative minimum tax.

An incentive stock option (ISO) is a right to buy your employer's stock at a price fixed on the grant date. The IRS calls it a statutory stock option. You generally owe no regular income tax when you receive or exercise it. You may owe alternative minimum tax (AMT) in the year you exercise.

**A round example.** For example, say your option price is $10 a share and the stock is worth $50 on the day you exercise. You pay $10 a share. The $40 gap is not regular income that year, but it can count toward AMT. These numbers are for illustration only.

When you sell, the gain is generally a capital gain. If you miss the special holding period rules, part of it becomes ordinary income instead. After you exercise, your employer sends Form 3921 with the dates and values you need.

**Why it matters to your plan.** One exercise can change your tax bill, your cash needs and the stock you plan to give. Work out the timing with your own CPA before you exercise. Our [equity compensation guide](https://seekfirst.multisites.ai/guides/equity-compensation-rsus-isos-espps) walks through the questions to ask.

[Read nextProactive tax planning: Roth conversions, equity pay and giving, planned before tax season](https://seekfirst.multisites.ai/tax-planning)

## Related terms

-   [employee stock purchase plan](https://seekfirst.multisites.ai/glossary/employee-stock-purchase-plan)
-   [step-up in basis](https://seekfirst.multisites.ai/glossary/step-up-in-basis)
-   [annual gift tax exclusion](https://seekfirst.multisites.ai/glossary/annual-gift-tax-exclusion)

## Sources

1.  [IRS: Topic no. 427, Stock options](https://www.irs.gov/taxtopics/tc427)
2.  [IRS: Topic no. 427, Stock options](https://www.irs.gov/taxtopics/tc427)
3.  [IRS: Topic no. 427, Stock options](https://www.irs.gov/taxtopics/tc427)

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