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A non-qualified stock option (NQSO) is a type of employee stock option where the difference between the discounted price and the market value is considered ordinary income and taxed accordingly. This differs from incentive stock options (ISOs), which offer tax advantages to employees.
When an employee exercises an NQSO, the difference between the market price of the stock at the time of purchase and the strike price (the discounted price at which employees can buy the stock) is treated as ordinary income. This income is subject to standard tax rates and must be reported in the year of the exercise. While NQSOs lack the tax benefits of ISOs, they are more flexible and have fewer restrictions, which makes them a useful tool for compensating a broader range of employees or contractors.
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