Which statement accurately describes Incentive Stock Options (ISOs) tax treatment, including AMT considerations?

• A. No income recognized when granted; no tax due when exercised; tax due when stock is sold; gains may be capital if holding periods are met.
• B. Tax is due at grant as ordinary income.
• C. They are taxed as capital gains at exercise.
• D. No tax consequences at any point.

Answer: (A)

ISOs have favorable tax treatment that hinges on the timing of grant, exercise, and sale. At grant, there is no regular income tax. When you exercise, you generally don’t owe ordinary income tax on the spread between the market price at exercise and your strike price, unlike nonqualified options. However, that bargain element can trigger the Alternative Minimum Tax in the year you exercise, so AMT obligations may arise even if your regular tax is zero. When you sell, if you’ve held the shares long enough—at least two years from grant and at least one year from exercise—the sale proceeds are treated as long‑term capital gains. If you don’t meet those holding periods, you may have a disqualifying disposition, and part of the gain could be taxed as ordinary income in the year of sale. The description that matches this pattern—no regular tax at grant, no regular tax on exercise, tax on sale with potential long‑term capital gain if holding periods are met—best reflects ISO tax treatment, with the important caveat that AMT may apply in the exercise year.