An incentive stock option (ISO) is a company benefit that gives an employee the right to buy stock shares at a discounted price with the added allure of a tax break on the profit. The profit on incentive stock options is taxed at the capital gains rate, not the higher rate for ordinary income.Click to see full answer. In this regard, should I exercise my ISO?If you decide to leave your company prior to being fully vested and you early-exercised all your options then your employer will buy back your unvested stock at your exercise price. The benefit to exercising your options early is that you start the clock on qualifying for long-term capital gains treatment earlier.Similarly, do I need to file Form 3921? If employees exercised incentive stock options (ISOs) last tax year, your company needs to file IRS Form 3921. Companies must file one form per ISO exercise, and if they miss the deadline or ignore IRS reminders and fail to file, they could end up paying expensive fines. Secondly, what does it mean to exercise stock options? Exercising a stock option means purchasing the issuer’s common stock at the price set by the option (grant price), regardless of the stock’s price at the time you exercise the option. See About Stock Options for more information.Do you get taxed when you exercise stock options? Exercising an option When you exercise an incentive stock option (ISO), there are generally no tax consequences, although you will have to use Form 6251 to determine if you owe any Alternative Minimum Tax (AMT).