Accredited Wealth Management Advisor Practice Exam

How long must a holder keep shares acquired through incentive stock options to maintain their ISO status?

1. Two years from the exercise date

2. One year from the exercise date

3. Two years from the grant date

4. One year from the grant date

The correct answer is: Two years from the grant date

To maintain the favorable tax treatment associated with Incentive Stock Options (ISOs), the holder must keep the shares acquired through exercise for a minimum of two years from the grant date. This requirement is crucial because it ensures that the gains on the stock are treated as long-term capital gains instead of ordinary income upon sale. Long-term capital gains typically have a more favorable tax rate compared to ordinary income, providing a significant tax benefit to the individual. Additionally, holding the shares for at least one year after exercising the options is necessary to realize the tax benefits properly. However, the critical point is that the two-year holding period from the grant date is what distinguishes the ISOs from other types of stock options and provides the intended tax advantages. Meeting this requirement allows the holder to maximize their potential profit without incurring higher taxes that would arise from selling the shares prematurely.