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Incentive stock option

An option that allows an employee to purchase stock of the employer below current market price. For regular income tax purposes, the “spread” or “bargain element”— the difference between the price paid and market value of the stock—is not taxed when the option is exercised. Rather, it is taxed when the stock is sold. For alternative minimum tax purposes, however, the spread is taxed in the year the option is exercised.