Nonqualified Stock Option
Last reviewed: September 2, 2026
A nonqualified stock option (NSO or NQSO) gives an employee or other recipient the right to buy company stock at a stated exercise price, but it does not receive the special U.S. tax treatment available to an incentive stock option.
How it works
The company grants an option with an exercise price and usually a vesting schedule. If the market value later rises above the exercise price, the holder may choose to exercise and buy the shares.
Basic U.S. tax idea
For many employee NSOs, the spread between the stock's fair market value and the exercise price is generally treated as compensation income when the option is exercised. Later gains or losses on the shares can have separate tax consequences.
Why plan documents matter
Vesting, expiration, exercise windows and tax treatment can vary. The company's equity plan and current tax guidance control the actual result.
Sources and further reading
- IRS Publication 525 — taxable and nontaxable income guidance.