Friday, I discussed the ISO and the possible taxable benefits. A Nonqualified Stock Option does not have the holding restrictions of an ISO; however the taxable benefits are lost. The NQSO is a great option for an employee who is more risk averse. As the ISO, the grant date of the NQSO does not create taxation, as long as the exercise price is equal to or greater than the stock’s fair market value. When the employee exercise’s his NQSO, he will have W-2 income equal to the appreciation of the stock’s fair market value over the exercise price. This income is subject to withholding taxes. The fair market value of the stock on this date, becomes the employee’s adjusted basis. When the stock is sold for a greater value than the adjusted basis, and it is held for longer than a year from the exercise price, it will be treated as a long-term capital gain. If it is held for less than a year, it is a short-term capital gain. If the sale price is lower than the adjusted basis, the employee will recognize a loss. It is important to seek the help of a professional when one is offered a ISO and NQSO due to the complicated taxation.