Updated October 9, 2026. A nonqualified stock option, or NSO, is a right to buy company stock later at a price fixed today, usually the market price on the grant date. “Nonqualified” means the option does not meet the Internal Revenue Code rules for incentive stock options.
There is normally no tax at grant. At exercise, the spread between the strike and the fair market value is ordinary income, and the employer withholds. Your basis in the shares becomes the fair market value at exercise. Later gain or loss is capital, short-term or long-term depending on how long you hold the shares after exercise.
NSOs can be granted to employees, directors, and contractors. ISOs cannot be granted to contractors. NSOs do not have the ISO $100,000 annual vesting limit. They also do not create the alternative minimum tax adjustment that ISOs can create at exercise.
The option expires on the date in the grant, often 10 years, and sooner after you leave. Exercising after termination follows the plan’s post-termination window. Those windows are often 90 days and are easy to miss.