Free interactive tool

ISO vs NSO designation flow.

Answer six questions about the optionee, the grant terms, and the company. The flow walks the IRC § 422 requirements in order and tells you the right classification, with the reasoning and the citations.

  • Optionee classification (employee vs contractor vs director)
  • 10% shareholder test (strike + term adjustments)
  • $100K annual limit (IRC § 422(d) reclassification)
  • Post-termination exercise window check
  • Optional emailed PDF summary of the decision
Start the flow
Walk the IRC § 422 requirements.

Answer in order. The flow short-circuits as soon as a hard requirement fails, since ISO classification is binary.

Optional · Save this decision
Email me the designation memo as a PDF.

We’ll send a one-page memo with the answers, the classification result, and the IRC § 422 citations, ready to attach to the board resolution authorizing the grant.

We’ll send the PDF and occasional corporate-records tips. Unsubscribe any time. We don’t share your email.

FAQ

Common questions

An ISO is a tax-qualified option under IRC § 422. If the optionee meets the holding periods (one year from exercise, two years from grant), the gain at sale is taxed at long-term capital gains rates, not ordinary income. An NSO is taxed at ordinary rates on the exercise spread. ISOs have meaningfully better tax outcomes but only when every statutory requirement is met.

Only employees of the issuing corporation, its parent, or a subsidiary. Directors who are not also employees, independent contractors, advisors, and consultants cannot receive ISOs, their grants must be NSOs as a matter of law.

IRC § 422(d): the aggregate FMV of stock first exercisable as an ISO in any one calendar year, for any one optionee, cannot exceed $100,000. FMV measured at grant. Anything over $100,000 in a given year is reclassified as NSO automatically.

If the optionee owns more than 10% of the total voting power of the company at the time of grant, the ISO is only valid if the strike is at least 110% of FMV (vs 100% for ordinary ISOs) and the term is at most 5 years (vs 10 years). Common at very early-stage companies with concentrated ownership.

ISO treatment requires exercise within 3 months of termination (12 months for disability, no limit for death). Most plans allow longer post-termination exercise windows, common is 90 days or longer, which means later exercises automatically convert to NSO treatment even though the original grant was an ISO.

No, ISO vs NSO is a US tax classification. Canadian options follow IRC equivalents under Income Tax Act section 7, with CCPC-specific treatment under section 110(1)(d.1). UK options follow EMI / CSOP / SAYE schemes under ITEPA 2003.
Related concepts

The equity stack around ISO classification.

Templates and calculators for the documents that actually carry the grants this tool classifies.

Stock options
The instrument being classified
Option pool
The reserve that issues grants
Vesting cliff
Drives the $100K-limit calendar
409A valuation
Sets the FMV strike floor
Option Grant Notice (DE)
The document that records the classification
Option Pool Planner
Size the pool that feeds these grants
83(b) Election Timing
For early-exercise ISOs and restricted stock
QSBS Calculator
Downstream tax-exclusion math
ISO vs NSO (glossary)
The classification, in depth
When the grant lives on real records.

Octelligence captures the ISO/NSO classification on the option grant notice, links it to the authorizing board resolution, and tracks the $100K calendar at the optionee level so designation drift gets caught at issuance, not at exit.

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