What's the difference between ISOs and NSOs?

ISOs (incentive stock options) and NSOs (non-qualified stock options) differ mainly in tax treatment. NSOs are simpler: at exercise, the spread between the strike price and fair market value is taxed as ordinary income and reported on your W-2, with no special holding rules. ISOs are tax-advantaged but stricter: there's no ordinary income at exercise for regular tax, and if you hold the shares long enough you can get the entire gain at long-term capital gains rates. The catch is that exercising and holding ISOs can trigger the alternative minimum tax (AMT). Only employees can receive ISOs, and there's a $100,000-per-year vesting limit; contractors and board members get NSOs. Knowing which type you hold determines your entire exercise strategy.