---
title: NSO (non-qualified stock option) — what it means and why it matters | Allocate AI
description: A stock option where the gain between your strike price and the share value is taxed as ordinary income the moment you exercise.
canonical: https://allocateai.io/glossary/nso
site: Allocate AI — https://allocateai.io
---

# NSO (non-qualified stock option)

A stock option where the gain between your strike price and the share value is taxed as ordinary income the moment you exercise.

A non-qualified stock option (also written NQSO) is the plain version of an employee stock option. You get the right to buy shares at a set strike price for a set number of years. When you exercise, the spread between the strike and the current value is taxed right then as ordinary income, and your employer withholds on it like a bonus.

Say you hold 5,000 NSOs at a $10 strike and the stock is worth $30. Exercising costs $50,000 in cash and creates $100,000 of taxable income. Your employer withholds at the supplemental rate (22% in 2026, or 37% above $1 million), and the shares you now own have a cost basis of $30. Any later movement is a capital gain or loss.

NSOs are what most people get after they exceed the ISO limit, what contractors and advisors get, and what many later-stage companies grant by default. They are simpler than ISOs and have no AMT surprise, but they are less tax-efficient.

The common mistake is exercising without enough cash for both the strike price and the tax. Many plans allow a cashless exercise, where shares are sold immediately to cover both. Another mistake is letting options expire: they usually lapse 90 days after you leave the company, and some lapse the day you walk out.

## Related terms

- [ISO (incentive stock option)](https://allocateai.io/glossary/iso) — A type of employee stock option with special tax treatment: no regular income tax when you exercise, and possible long-term capital gains if you hold.
- [Strike price (exercise price)](https://allocateai.io/glossary/strike-price) — The fixed price at which a stock option lets you buy a share, set when the option is granted, no matter what the stock is worth later.
- [Supplemental wages (and supplemental withholding)](https://allocateai.io/glossary/supplemental-wages) — Pay that is not regular salary, like bonuses, commissions, and vested stock, which the IRS lets employers withhold on at a flat 22% rate (2026).
- [Cost basis](https://allocateai.io/glossary/cost-basis) — What you paid for an investment, including fees, or the value you were taxed on when you received it; the starting point for measuring gain or loss.

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Allocate AI is a budgeting and financial-planning app: link your accounts, say what you want in plain words, and it writes the plan and stages every change for your approval. Read more at https://allocateai.io or see all pages in https://allocateai.io/llms.txt.