Legal Definitions - nonqualified stock option

A nonqualified stock option is a type of stock option that is not eligible for special tax treatment under the Internal Revenue Code. It is also known as a nonstatutory stock option.

For example, if an employee is granted a nonqualified stock option to purchase 1,000 shares of their company's stock at $10 per share, and the stock price rises to $20 per share, the employee can exercise the option and purchase the shares for $10,000. They can then sell the shares for $20,000, resulting in a $10,000 profit.

This type of stock option is often used as a form of compensation for employees, but it does not have the same tax advantages as an incentive stock option (ISO). With a nonqualified stock option, the employee must pay taxes on the difference between the exercise price and the fair market value of the stock at the time of exercise.