Updated July 28, 2026. Quick answer: NSOs are ordinary income on the spread at exercise, with withholding. ISOs create no regular tax at exercise but add the spread to AMT income, and can reach long-term capital gain rates if you hold long enough.
Side by side
| NSO | ISO | |
|---|---|---|
| Tax at exercise | Ordinary income on the spread | None for regular tax |
| AMT at exercise | None | Spread is a preference item |
| Withholding | Yes, at the supplemental rate | No |
| Best case at sale | Capital gain from exercise-date basis | Long-term gain on the whole spread |
| Holding requirement | None | 2 years from grant, 1 from exercise |
| Who can receive | Anyone, including contractors | Employees only |
The trade in one line
ISOs offer a better rate in exchange for accepting phantom income and a holding period. NSOs cost more in tax and nothing in complexity.
Why you may hold both
The $100,000 annual limit converts excess ISOs into NSOs automatically, so a single grant can be split across both treatments without anyone telling you. Check which is which before planning an exercise — the AMT consequences differ entirely.
Sources
IRC §83(a) (NSO); IRC §421, §422 (ISO); IRC §56(b)(3); IRC §422(d).
This states what the cited authority says. It is not tax advice; AMT in particular is computed across your whole return and cannot be resolved from one page.