What restrictions do you mean? ISOs are better for the employee because any gain on exercise is not taxed as regular income. If the value is high enough the employee might be subject to alternative minimum tax (AMT), but the possibility of paying no tax is a benefit over NSOs whose gain is taxed as regular income and is subject to tax withholding.
> If the value is high enough the employee might be subject to alternative minimum tax (AMT)
I've never run the numbers, but my impression is that the AMT level is low enough that AMT will be triggered for any exercise where the number and value of options is meaningful.
>but the possibility of paying no tax is a benefit over NSOs whose gain is taxed as regular income and is subject to tax withholding.
It's not "no tax". It's "deferred tax". But again, in the real world of 6-figure salaries and big mortgage interest deductions in Silicon Valley, the deferral is probably mostly theoretical. Whereas the time limits on ISOs are real and unavoidable.
Good point, "deferred tax" is more appropriate there. "No tax" is misleading.
You might be able to stay out of AMT by splitting ISO exercises across multiple tax years, but that's splitting hairs. You make a good point that this discussion is most interesting in cases where you'd likely be in AMT anyway.
With ISOs, at least 2 years must lapse between the grant date and the employee’s sale of the stock, and at least one year must lapse between the exercise date and the sale of the stock. (This is a restriction - not related to capital gain treatment)
If NSOs are granted with a strike price equal to FMV, there are no taxes due until exercise. If granted at a discount, taxes are due on the difference between grant price and FMV.
The only downside there is the 2-year requirement between grant date and sale of stock, but that is unlikely if the company is still granting ISOs rather than RSUs. The second clause of that sentence is standard long term capital gains, which applies to NSOs as well; there's no restriction on either grant type on when you are allowed to sell the stock units once you exercise the option.
