Nonqualified Stock Option

Nonqualified Stock Option means:
a stock option that does not meet the incentive stock option requirements. Options to purchase company stock that are granted to employees as compensation but do not meet restrictions necessary to qualify as incentive stock options. An employee must report ordinary income on the spread, that is, the difference between the fair market value and the amount paid for the option in the year of exercise. This taxable spread is added to the amount paid by the employee to determine the basis for the stock. Any appreciation above the resulting basis is taxable as a long-term capital gain upon disposition of the stock. There is no tax consequence when the options are granted but when employees exercise the options to purchase stock, the “spread” or “bargain element” – the difference between purchase price and the stock's value – is taxed as additional compensation. Former IRC (check if this IRC provision is current here) §421. (See incentive stock options.)

U.S. and other Developed Countries International Tax Meaning

A stock option that does not meet the incentive stock option requirement under US tax law. The spread is taxed as ordinary income.

See also Capital Gain in the American Legal Encyclopedia and Capital Gain in the World Legal Encyclopedia.