What is the distinction between Restricted Stock, Incentive Stock Option, and Nonqualified Stock Option? We will use examples to describe each.

The right to buy stock at a specific price is given to the option holder, typically hoping for an increase in stock value over time. Under certain conditions, employees can receive Incentive Stock Options (ISOs), which offer potential tax benefits. Give the option holder the right to buy stock at a fixed price, usually with the expectation that the stock's value will increase over time.

• Employees are usually given incentive stock options (ISOs) that may provide tax benefits under certain conditions. In order to receive them, they must meet the IRS's requirements, which include holding periods and limits on who can receive them.
• NSOs, on the other hand, are available to both employees and non-employees, like directors and independent contractors. While they don't have as many tax advantages as ISOs, they are more flexible in terms of eligibility and other conditions.

Both kinds are meant to be enticing because they align the interests of employees or recipients with the company's growth and success.

When the stock or stock option is granted, the employee does not receive any income.

An incentive stock option and a nonqualified stock option are both types of options. The employee is not compensated for any income earned during the grant date for both incentive stock options (ISOs) and nonqualified stock options (NSOs).

When the stock or stock option is exercised, the employee does not receive any income.
When the incentive stock option is exercised there is no income recognized. Taxable income doesn't immediately follow the exercise of Incentive Stock Options (ISOs). When the stock acquired through exercised options is sold, a taxable event occurs.

The fair market value (FMV) of the stock and/or stock option is included in gross income in the year received.
The restricted stock's Fair Market Value (FMV) is included in gross income for the employee when it is received in that year. Upon receiving restricted stock, the employee may not immediately recognize its fair market value in gross income. When the stock vests, it is typically recognized instead.

Ordinary income is recognized when the stock and/or stock option are exercised, minus the exercise (strike) price at the exercise date.

When an NSO is exercised, the bargain element is regarded as ordinary income. The bargain element is the difference between the FMV of the stock option at the exercise date and the exercise price (strike price).

When the stock and/or stock option is sold, the difference between the sale price and exercise price is accounted for as capital gain.

The employee is credited with capital gain for the difference between the sale price and the basis when an ISO is sold. The basis is equal to the price of exercise (strike). When an ISO is granted or exercised, the employee does not receive any income.

The employee is compensated for the amount of income recognized on a basis.
The employee gets a stock basis equal to the amount of income recognized for restricted stock.

At the exercise date, the employee is given a bonus that is equivalent to the FMV.

NSOs have an employee who receives a basis in the stock that is equal to the FMV on the exercise date. The employee's income is not based on exercise price because it was recognized between FMV at the exercise date and the exercise price. The basis needs to be equal to the FMV by increasing the recognized income.

The employee receives a basis that is the same as the exercise price.
ISOs provide employees with a basis that is equal to the exercise (strike) price.