Legal Definitions - qualified stock option

A qualified stock option is a type of stock option that meets certain requirements set by the Internal Revenue Service (IRS) and allows the recipient to receive favorable tax treatment.

For example, if an employee is granted a qualified stock option and holds the stock for at least one year after exercising the option and two years after the grant date, any profit made from selling the stock is taxed at the lower long-term capital gains rate instead of the higher ordinary income tax rate.

Another example is if a company grants a qualified stock option to an employee with an exercise price of $10 per share and the stock price increases to $20 per share, the employee can exercise the option and purchase the stock for $10 per share, then sell it for $20 per share, resulting in a profit of $10 per share. This profit is taxed at the lower long-term capital gains rate if the employee meets the holding period requirements.

These examples illustrate how qualified stock options can provide tax benefits to employees and incentivize them to hold onto the stock for a longer period of time.