When your employer awards you non-qualified stock options, you may be able to use them to buy shares of company stock at a discount off the market price. Companies award stock options to retain, reward and motivate employees.

The amount of your profit is called the bargain element and appears on your Form W Typically, your employer will require that you wait for a specified period of time after you are awarded non-qualified stock options before exercising them. This waiting period is called a vesting period. Once the vesting period is completed, you may not want to exercise the options immediately. If the market value of the stock is less than the exercise price, using the options is worse than useless because the shares would be cheaper if you bought them at the market price.

In this situation, you would hold onto the options and hope the price goes up before the options expire. Vesting schedules are stated in the terms of non-qualified stock options awards. Usually only a portion of the options are vested at one time.

For example, 20 percent of the options might be vested after one year and another 20 percent each year until percent are vested. If you leave the job before some of the options are vested, you lose them. Employers may offer another kind of stock options called incentive options.

Under IRS rules, the bargain element is considered a capital gain -- not compensation -- and taxed at a maximum rate of 15 percent as of To get the tax break, you must wait at least one year to exercise incentive options.

The company may require a longer vesting period. You then must hold the shares for at least one additional year before selling them.

There's no vesting limit for non-qualified options. Vesting and Exercise Typically, your employer will require that you wait for a specified period of time after you are awarded non-qualified stock options before exercising them. Vesting Schedules Vesting schedules are stated in the terms of non-qualified stock options awards. Incentive Stock Options Employers may offer another kind of stock options called incentive options.

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