-7-
readily ascertainable fair market value, income is recognized on
the grant date, and the issuer is entitled to a deduction. Sec.
83(h); sec. 1.83-7(a), Income Tax Regs.
NSOs, when granted, may be “in-the-money”, “out-of-the-
money”, or “at-the-money”. ISOs, however, may only be “at-the-
money” or “out-of-the-money”.8 An option is deemed in-the-money
when the exercise price on the grant date is below the stock’s
market price. Conversely, an option is out-of-the-money when the
exercise price on the grant date is above the stock’s market
price. An option that has an exercise price equal to the stock’s
market price on the grant date is considered at-the-money.
An employee typically cannot exercise options, until the
employee has a vested right (i.e., a legal right that is not
contingent on the performance of additional services) in the
option pursuant to the stock option plan’s terms. Some companies
permit immediate vesting upon issuance of an option, while others
delay vesting several years or allow incremental vesting over a
period of years.
7(...continued)
the option privilege is readily ascertainable. Sec. 1.83-7(b)(1)
and (2), Income Tax Regs. “Option privilege” is the value of the
right to benefit from any future increase in the value of the
property subject to the option, without risking any capital.
Sec. 1.83-7(b)(3), Income Tax Regs.
8 Pursuant to sec. 422, the exercise price relating to ISOs
may not be less than the stock’s market price on the grant date.
Sec. 422(b)(4).
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Last modified: May 25, 2011