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ISO
Incentive Stock Options 
What is an ISO?
An ISO is a form of employee stock option that is granted only to employees of a corporation or business entity. An ISO offers a tax benefit that allows the holder to avoid ordinary income tax and employment taxes on the difference between the fair market value of the shares received and the exercise price of said shares. That being said, the holder of the ISO may be required to pay the United States alternative minimum tax.

 
If the share of the ISO are held for 1 year from the exercise date and 2 years from the date they were granted, then the profits realized (if any) from the sale of shares are taxed as a long-term capital gain. The taxation rates attached to long-term capital gains is lower than ordinary income.
Although an ISO has a more favorable tax treatment than non-ISO bundles or non-qualified stock options, an ISO will expose holders to greater levels of risk—holders of ISO’s are required to hold onto the stock for longer periods of time if the holder is given preferential tax treatment. 
Restrictions of ISO’s
An employer or issuer of an ISO does not claim corporate income tax deductions when the employee exercises the ISO, unless the individual does meet the holding requirements. Moreover, there are several other restrictions which are forced to be met by both the employer and the employee to qualify for the an ISO. For the option to qualify and to secure special tax treatment, the bundle is required to satisfy the requirements of Section 422 of the Internal Revenue Code. The requirements include the following:
The option must be granted only to an employee, who is then required to exercise the option while the individual maintains employment or no later than three months since the termination of employment. 
The ISO must be delivered under a legally-binding ISO agreement, which must be written and include all restrictions placed on exercising the option. Each provision must set forth offers to sell at the option price and the option's active life

The ISO must be provided within 10 years of the earlier of shareholder approval or adoption and the ISO must be exercisable only within 10 years of the offering. 
At the time of grant, the employee may not own stock representing more than 10% of the outstanding stock, unless the ISO exercise price is at least 110% of the fair market value. The option exercise price must equal or be greater than the fair market value of the underlying stock at the time of grant. 
The ISO agreement must state that the ISO cannot be transferred by the holder other than by will or by laws of descent. 
The fair market value, which is determined on the grant date, of the underlying stock bought by exercising the ISO for the first time may not exceed $100,000 in a given calendar year. 

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