How are ISOs and NSOs taxed differently?

NSOs are taxed at exercise - the spread is ordinary income plus FICA. ISOs are not taxed under the regular system at exercise, but the spread becomes an AMT preference item if you exercise and hold past year-end.

Which is better, ISO or NSO?

ISOs can qualify for all-capital-gains treatment if you hold long enough, which is more favorable, but they risk triggering AMT. NSOs are simpler and predictable but always taxed as ordinary income. The right choice depends on your tax year and cash.

Do I pay FICA on stock options?

NSOs are subject to Social Security and Medicare at exercise. ISOs are not subject to FICA.

Can the same option be part ISO and part NSO?

Yes. ISO treatment is capped at $100,000 of stock (by grant value) becoming exercisable per year; anything above that limit is automatically treated as an NSO.

Stock option tax calculator

Estimate tax at exercise for ISOs (AMT) and NSOs (ordinary income + FICA) in one tool.

Two option types, two tax systems

Employee stock options come in two flavors that are taxed completely differently, and this calculator lets you switch between them to compare:

NSOs (non-qualified) are taxed at exercise: the spread between fair market value and your strike is ordinary income, withheld at the supplemental rate plus FICA.
ISOs (incentive) get special treatment - no regular tax at exercise - but the spread becomes a preference item under the alternative minimum tax if you exercise and hold past December 31.

Worked example: NSO

Exercise 5,000 NSOs, $2 strike, $12 FMV, $200,000 other income, California:

Spread: $50,000 ordinary income
Exercise cost: $10,000
Total tax at exercise (federal + state + FICA): about $17,290

Worked example: ISO

Exercise 10,000 ISOs, $1 strike, $11 FMV, $200,000 income, single, and hold:

Bargain element: $100,000
Exercise cost: $10,000
Estimated AMT: about $17,840 - no ordinary tax or FICA, but an AMT bill

Notice the AMT on the ISO is similar in size to the ordinary tax on the NSO here

but the ISO can later qualify for all-long-term-capital-gains treatment, while the NSO cannot.

Choosing your move

ISOs reward holding: meet the holding periods (more than two years from grant and one year from exercise) and the entire gain can be a long-term capital gain. The risk is a large AMT bill in the exercise year, and tying up cash. NSOs are simpler - always ordinary income - but never get the capital-gains break.

A practical rule of thumb:

If you have the cash and conviction to hold, ISOs can be more tax-efficient - model the AMT first with the ISO exercise tax calculator.
If you want predictability or need to sell soon, NSO-style ordinary-income treatment (or a same-day ISO sale) is cleaner.

The $100,000 ISO limit

Only $100,000 of stock (measured by grant-date value) can become exercisable as ISOs in any year. Grants above that limit spill over and are taxed as NSOs automatically - so a large grant is often part ISO, part NSO whether you intend it or not.

Common mistakes

Exercising ISOs late in December and holding, locking in an AMT bill with no time to undo it.
Assuming a whole large grant is ISO when the $100k limit pushed part to NSO.
Exercising without the cash for both the strike price and the resulting tax.

To go deeper on either path, use the AMT / ISO calculator for the AMT, or the NSO tax calculator for ordinary-income options.

Last reviewed January 2026. This calculator provides general educational estimates based on the inputs you enter and simplified assumptions. It is not financial, tax, legal or investment advice, and figures may differ from your actual liability. Verify with a licensed CPA or financial advisor before acting.