Stock Option Type
Not all stock options are created equal, and the differences are rooted in tax law. For most companies, the two stock option types typically used are Incentive stock options (ISO) and Nonqualified stock options (NSO).
ISOs are reserved specifically for employees, and have tax advantages over NSOs depending on how long you hold onto them. If you fully take advantage of ISO tax savings, you can drop your tax rate to long-term capital gains (currently 15% for most people) instead of paying your ordinary income tax bracket (currently up to 39.6%).
NSOs can be issued to both employees and non-employees. They’re “nonqualified” because they don’t qualify for the tax advantages reserved for ISOs, and you’ll be taxed at your ordinary income tax bracket.