An Incentive Stock Option (ISO) is a type of stock option that allows favorable tax treatment to the stock option holder. The main tax benefits of incentive stock options are that the incentive stock option holder can:
(1) delay his or her personal taxable event until the stock is actually sold by the holder (instead of at the exercise of the option), and
(2) receive long-term capital gains treatment for taxable gain at the stock sale (instead of ordinary income tax rates).
In order to receive the tax benefits of an ISO, the startup and incentive stock option holder must comply with various rules.