The right to purchase company stock at a specific exercise price over a stated option term. Generally, an ISO entitles you to favorable tax treatment if the acquired shares are held for at least one year from the date of exercise and two years from the grant date. If you adhere to the required holding period, the difference between the sale price and grant price will be taxed at a capital gains rate. However, if you choose to sell off all or a portion of the shares before the expiration of the applicable holding periods, you may recognize ordinary income and will be taxed accordingly. In non-U.S. locations, tax implications may vary; consult your employer or tax advisor.