Title 26 — Internal Revenue Code
Part II · Chapter 1 — Normal Taxes and Surtaxes
§ 422. Incentive stock options
Statutory text
In general
Section 421(a) shall apply with respect to the transfer of a share of stock to an individual pursuant to his exercise of an incentive stock option if—
no disposition of such share is made by him within 2 years from the date of the granting of the option nor within 1 year after the transfer of such share to him, and
at all times during the period beginning on the date of the granting of the option and ending on the day 3 months before the date of such exercise, such individual was an employee of either the corporation granting such option, a parent or subsidiary corporation of such corporation, or a corporation or a parent or subsidiary corporation of such corporation issuing or assuming a stock option in a transaction to which section 424(a) applies.
Incentive stock option
For purposes of this part, the term “incentive stock option” means an option granted to an individual for any reason connected with his employment by a corporation, if granted by the employer corporation or its parent or subsidiary corporation, to purchase stock of any of such corporations, but only if—
the option is granted pursuant to a plan which includes the aggregate number of shares which may be issued under options and the employees (or class of employees) eligible to receive options, and which is approved by the stockholders of the granting corporation within 12 months before or after the date such plan is adopted;
such option is granted within 10 years from the date such plan is adopted, or the date such plan is approved by the stockholders, whichever is earlier;
such option by its terms is not exercisable after the expiration of 10 years from the date such option is granted;
the option price is not less than the fair market value of the stock at the time such option is granted;
such option by its terms is not transferable by such individual otherwise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him; and
such individual, at the time the option is granted, does not own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the employer corporation or of its parent or subsidiary corporation.
Such term shall not include any option if (as of the time the option is granted) the terms of such option provide that it will not be treated as an incentive stock option. Such term shall not include any option if an election is made under section 83(i) with respect to the stock received in connection with the exercise of such option.
Special rules
Good faith efforts to value stock
If a share of stock is transferred pursuant to the exercise by an individual of an option which would fail to qualify as an incentive stock option under subsection (b) because there was a failure in an attempt, made in good faith, to meet the requirement of subsection (b)(4), the requirement of subsection (b)(4) shall be considered to have been met. To the extent provided in regulations by the Secretary, a similar rule shall apply for purposes of subsection (d).
Certain disqualifying dispositions where amount realized is less than value at exercise
If—
an individual who has acquired a share of stock by the exercise of an incentive stock option makes a disposition of such share within either of the periods described in subsection (a)(1), and
such disposition is a sale or exchange with respect to which a loss (if sustained) would be recognized to such individual,
then the amount which is includible in the gross income of such individual, and the amount which is deductible from the income of his employer corporation, as compensation attributable to the exercise of such option shall not exceed the excess (if any) of the amount realized on such sale or exchange over the adjusted basis of such share.
Certain transfers by insolvent individuals
If an insolvent individual holds a share of stock acquired pursuant to his exercise of an incentive stock option, and if such share is transferred to a trustee, receiver, or other similar fiduciary in any proceeding under title 11 or any other similar insolvency proceeding, neither such transfer, nor any other transfer of such share for the benefit of his creditors in such proceeding, shall constitute a disposition of such share for purposes of subsection (a)(1).
Permissible provisions
An option which meets the requirements of subsection (b) shall be treated as an incentive stock option even if—
the employee may pay for the stock with stock of the corporation granting the option,
the employee has a right to receive property at the time of exercise of the option, or
the option is subject to any condition not inconsistent with the provisions of subsection (b).
Subparagraph (B) shall apply to a transfer of property (other than cash) only if section 83 applies to the property so transferred.
10-percent shareholder rule
Subsection (b)(6) shall not apply if at the time such option is granted the option price is at least 110 percent of the fair market value of the stock subject to the option and such option by its terms is not exercisable after the expiration of 5 years from the date such option is granted.
Special rule when disabled
For purposes of subsection (a)(2), in the case of an employee who is disabled (within the meaning of section 22(e)(3)), the 3-month period of subsection (a)(2) shall be 1 year.
Fair market value
For purposes of this section, the fair market value of stock shall be determined without regard to any restriction other than a restriction which, by its terms, will never lapse.
$100,000 per year limitation
In general
To the extent that the aggregate fair market value of stock with respect to which incentive stock options (determined without regard to this subsection) are exercisable for the 1st time by any individual during any calendar year (under all plans of the individual’s employer corporation and its parent and subsidiary corporations) exceeds $100,000, such options shall be treated as options which are not incentive stock options.
Ordering rule
Paragraph (1) shall be applied by taking options into account in the order in which they were granted.
Determination of fair market value
For purposes of paragraph (1), the fair market value of any stock shall be determined as of the time the option with respect to such stock is granted.
Legislative history
Reconstructed from this section’s Code source credit and amendment notes, resolved against the local Statutes at Large. Editorial notes are evidence, not the law that made the change.
Economic Recovery Tax Act of 1981
Pub. L. 97–34 title II § 251(a) · 95 Stat. 175
Enacted · 26 U.S.C. § 422
Added Pub. L. 97–34, title II, § 251(a), Aug. 13, 1981, 95 Stat. 256, § 422A
Source evidence
Code source credit
Added Pub. L. 97–34, title II, § 251(a), Aug. 13, 1981, 95 Stat. 256, § 422AEnacted provision · exact public law section
(a) In general.— Part II of subchapter D of chapter 1 (relating to certain stock options) is amended by adding after section 422 the following new section: “SEC. 422A. INCENTIVE STOCK OPTIONS. “(a) In General.— Section 421(a) shall apply with respect to the transfer of a share of stock to an individual pursuant to his exercise of an incentive stock option if— “(1) no disposition of such share is made by him within 2 years from the date of the granting of the option nor within 1 year after the transfer of such share to him, and “(2) at all times during the period beginning on the date of the granting of the option and ending on the day 3 months before the date of such exercise, such individual was an employee of either the corporation granting such option, a parent or subsidiary corporation of such corporation, or a corporation or a parent or subsidiary corporation of such corporation issuing or assuming a stock option in a transaction to which section 425(a) applies. “(b) Incentive Stock Option.— For purposes of this part, the term ‘incentive stock option’ means an option granted to an individual for any reason connected with his employment by a corporation, if granted by the employer corporation or its parent or subsidiary corporation, to purchase stock of any of such corporations, but only if— “(1) the option is granted pursuant to a plan which includes the aggregate number of shares which may be issued under options and the employees (or class of employees) eligible to receive options, and which is approved by the stockholders of the granting corporation within 12 months before or after the date such plan is adopted; “(2) such option is granted within 10 years from the date such plan is adopted, or the date such plan is approved by the stockholders, whichever is earlier; “(3) such option by its terms is not exercisable after the expiration of 10 years from the date such option is granted; “(4) the option price is not less than the fair market value of the stock at the time such option is granted; “(5) such option by its terms is not transferable by such individual otherwise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him; “(6) such individual, at the time the option is granted, does not own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the employer corporation or of its parent or subsidiary corporation; “(7) such option by its terms is not exercisable while there is outstanding (within the meaning of subsection (c)(7)) any incentive stock option which was granted, before the granting of such option, to such individual to purchase stock in his employer corporation or in a corporation which (at the time of the granting of such option) is a parent or subsidiary corporation of the employer corporation, or in a predecessor corporation of any of such corporations; and “(8) in the case of an option granted after December 31, 1980, under the terms of the plan the aggregate fair market value (determined as of the time the option is granted) of the stock for which any employee may be granted options in any calendar year (under all such plans of his employer corporation and its parent and subsidiary corporation) shall not exceed $100,000 plus any unused limit carryover to such year. “(c) Special Rules.— “(1) Exercise of option when price is less than value of stock.— If a share of stock is transferred pursuant to the exercise by an individual of an option which would fail to qualify as an incentive stock option under subsection (b) because there was a failure in an attempt, made in good faith, to meet the requirement of subsection (b)(4), the requirement of subsection (b)(4) shall be considered to have been met. “(2) Certain disqualifying dispositions where amount realized is less than value at exercise.— If— “(A) an individual who has acquired a share of stock by the exercise of an incentive stock option makes a disposition of such share within the 2-year period described in subsection (a)(1), and “(B) such disposition is a sale or exchange with respect to which a loss (if sustained) would be recognized to such individual, then the amount which is includible in the gross income of such individual, and the amount which is deductible from the income of his employer corporation, as compensation attributable to the exercise of such option shall not exceed the excess (if any) of the amount realized on such sale or exchange over the adjusted basis of such share. “(3) Certain transfers by insolvent individuals.— If an insolvent individual holds a share of stock acquired pursuant to his exercise of an incentive stock option, and if such share is transferred to a trustee, receiver, or other similar fiduciary in any proceeding under title 11 or any other similar insolvency proceeding, neither such transfer, nor any other transfer of such share for the benefit of his creditors in such proceeding, shall constitute a disposition of such share for purposes of subsection (a)(1). “(4) Carryover of unused limit.— “(A) In general.— If— “(i) $100,000 exceeds, “(ii) the aggregate fair market value (determined as of the time the option is granted) of the stock for which an employee was granted options in any calendar year after 1980 (under all plans described in subsection (b) of his employer corporation and its parent and subsidiary corporations), one-half of such excess shall be unused limit carryover to each of the 3 succeeding calendar years. “(B) Amount carried to each year.— The amount of the unused limit carryover from any calendar year which may be taken into account in any succeeding calendar year shall be the amount of such carryover reduced by the amount of such carryover which was used in prior calendar years. “(C) Special rules.— For purposes of subparagraph (B)— “(i) the amount of options granted during any calendar year shall be treated as first using up the $100,000 limitation of subsection (b)(8), and “(ii) then shall be treated as using up unused limit carryovers to such year in the order of the calendar years in which the carryovers arose. “(5) Permissible provisions.— An option which meets the requirements of subsection (b) shall be treated as an incentive stock option even if— “(A) the employee may pay for the stock with stock of the corporation granting the option, “(B) the employee has a right to receive property at the time of exercise of the option, or “(C) the option is subject to any condition not inconsistent with the provisions of subsection (b). Subparagraph (B) shall apply to a transfer of property (other than cash) only if section 83 applies to the property so transferred. “(6) Coordination with sections 422 and 424.— Sections 422 and 424 shall not apply to an incentive stock option. “(7) Options outstanding.— For purposes of subsection (b)(7), any incentive stock option shall be treated as outstanding until such option is exercised in full or expires by reason of lapse of time. “(8) 10-percent shareholder rule.— Subsection (b)(6) shall not apply if at the time such option is granted the option price is at least 110 percent of the fair market value of the stock subject to the option and such option by its terms is not exercisable after the expiration of 5 years from the date such option is granted. “(9) Special rule when disabled.— For purposes of subsection (a)(2), in the case of an employee who is disabled (within the meaning of section 105(d)(4)), the 3-month period of subsection (a)(2) shall be 1 year.”Pub. L. 97–448 § 102(j)(1) · 96 Stat. 2365
Substituted · 26 U.S.C. § 422(b)(8)
Pub. L. 97–448, § 102(j)(1), substituted “granted incentive stock options” for “granted options”
Source evidence
Code amendment note
Subsec. (b)(8). Pub. L. 97–448, § 102(j)(1), substituted “granted incentive stock options” for “granted options”.Enacted provision · exact public law section
(1) Paragraph (8) of section 422A(b) (defining incentive stock option) is amended by striking out “granted options” and inserting in lieu thereof “granted incentive stock options”.Pub. L. 97–448 § 102(j)(2) · 96 Stat. 2365
Substituted · 26 U.S.C. § 422(c)(1)
Pub. L. 97–448, § 102(j)(2), substituted “Good faith efforts to value stock” for “Exercise of option when price is less than value of stock” as par. (1) heading
Inserted · 26 U.S.C. § 422(c)(1)
Pub. L. 97–448, § 102(j)(2), inserted sentence providing that, to the extent provided in regulations by the Secretary, a rule similar to that already enunciated in the paragraph applies for purposes of par. (8) of subsec. (b) and par. (4) of subsec. (c)
Source evidence
Code amendment note
Subsec. (c)(1). Pub. L. 97–448, § 102(j)(2), substituted “Good faith efforts to value stock” for “Exercise of option when price is less than value of stock” as par. (1) heading and inserted sentence providing that, to the extent provided in regulations by the Secretary, a rule similar to that already enunciated in the paragraph applies for purposes of par. (8) of subsec. (b) and par. (4) of subsec. (c).Enacted provision · exact public law section
(2) Paragraph (1) of section 422A(c) (relating to exercise of option where price is less than value of stock) is amended— (A) by adding at the end thereof the following new sentence: “To the extent provided in regulations by the Secretary, a similar rule shall apply for purposes of paragraph (8) of subsection (b) and paragraph (4) of this subsection.”, and (B) by striking out the paragraph heading and inserting in lieu thereof the following: “(1) Good faith efforts to value stock.—”.Pub. L. 97–448 § 102(j)(3) · 96 Stat. 2365
Substituted · 26 U.S.C. § 422(c)(2)(A)
Pub. L. 97–448, § 102(j)(3), substituted “either of the periods” for “the 2-year period”
Source evidence
Code amendment note
Subsec. (c)(2)(A). Pub. L. 97–448, § 102(j)(3), substituted “either of the periods” for “the 2-year period”.Enacted provision · exact public law section
(3) Subparagraph (A) of section 422A(c)(2) (relating to certain disqualified dispositions where amount realized is less than value at exercise) is amended by striking out “the 2-year period” and inserting in lieu thereof “either of the periods”.Pub. L. 97–448 § 102(j)(4) · 96 Stat. 2365
Substituted · 26 U.S.C. § 422(c)(4)(A)(ii)
Pub. L. 97–448, § 102(j)(4), substituted “granted incentive stock options” for “granted options”
Source evidence
Code amendment note
Subsec. (c)(4)(A)(ii). Pub. L. 97–448, § 102(j)(4), substituted “granted incentive stock options” for “granted options”.Enacted provision · exact public law section
(4) Clause (ii) of section 422A(c)(4)(A) (relating to carryover of unused limit) is amended by striking out “granted options” and inserting in lieu thereof “granted incentive stock options”.Spending Reduction Act of 1984
Pub. L. 98–369 § 2662(f)(1) · 98 Stat. 494
Substituted · 26 U.S.C. § 422(c)(9)
Pub. L. 98–369, § 2662(f)(1), substituted “section 37(e)(3)” for “section 105(d)(4)”
Source evidence
Code amendment note
Subsec. (c)(9). Pub. L. 98–369, § 2662(f)(1), substituted “section 37(e)(3)” for “section 105(d)(4)”.Enacted provision · exact public law section
(1) Section 422A(c)(9) of the Internal Revenue Code of 1954 26 USC 422A. (relating to special rule when disabled) is amended by striking out “section 105(d)(4)” and inserting in lieu thereof “section 37(e)(3)”.Tax Reform Act of 1984
Pub. L. 98–369 § 555(a)(1) · 98 Stat. 494
Added · 26 U.S.C. § 422(c)(10)
Pub. L. 98–369, § 555(a)(1), added par. (10)
Source evidence
Code amendment note
Subsec. (c)(10). Pub. L. 98–369, § 555(a)(1), added par. (10).Enacted provision · exact public law section
(1) In general.— Subsection (c) of section 422A (relating to 26 USC 422A. special rules) is amended by adding at the end thereof of the following new paragraph: “(10) Fair market value.— For purposes of this section, the fair market value of stock shall be determined without regard to any restriction other than a restriction which, by its terms, will never lapse.”Tax Reform Act of 1986
Pub. L. 99–514 § 321(a) · 100 Stat. 2085
Added · 26 U.S.C. § 422(b)(7)
Pub. L. 99–514, § 321(a), added par. (7)
Struck · 26 U.S.C. § 422(b)(7)
Pub. L. 99–514, § 321(a), struck out former par. (7) which read as follows: “such option by its terms is not exercisable while there is outstanding (within the meaning of subsection (c)(7)) any incentive stock option which was granted, before the granting of such option, to such individual to purchase stock in his employer corporation or in a corporation which (at the time of the granting of such option) is a parent or subsidiary corporation of the employer corporation, or in a predecessor corporation of any of such corporations; and”
Source evidence
Code amendment note
Subsec. (b)(7). Pub. L. 99–514, § 321(a), added par. (7) and struck out former par. (7) which read as follows: “such option by its terms is not exercisable while there is outstanding (within the meaning of subsection (c)(7)) any incentive stock option which was granted, before the granting of such option, to such individual to purchase stock in his employer corporation or in a corporation which (at the time of the granting of such option) is a parent or subsidiary corporation of the employer corporation, or in a predecessor corporation of any of such corporations; and”.Enacted provision · exact public law section
(a) General Rule.— Subsection (b) of section 422A is amended by inserting “and” at the end of paragraph (6) and by striking out paragraphs (7) and (8) and inserting in lieu thereof the following new paragraph: “(7) under the terms of the plan, the aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the 1st time by such individual during any calendar year (under all such plans of the individual’s employer corporation and its parent and subsidiary corporations) shall not exceed $100,000.”Tax Reform Act of 1986
Pub. L. 99–514 § 321(a) · 100 Stat. 2085
Struck · 26 U.S.C. § 422(b)(8)
Pub. L. 99–514, § 321(a), struck out par. (8) which read as follows: “in the case of an option granted after December 31, 1980, under the terms of the plan the aggregate fair market value (determined as of the time the option is granted) of the stock for which any employee may be granted incentive stock options in any calendar year (under all such plans of his employer corporation and its parent and subsidiary corporation) shall not exceed $100,000 plus any unused limit carryover to such year.”
Source evidence
Code amendment note
Subsec. (b)(8). Pub. L. 99–514, § 321(a), struck out par. (8) which read as follows: “in the case of an option granted after December 31, 1980, under the terms of the plan the aggregate fair market value (determined as of the time the option is granted) of the stock for which any employee may be granted incentive stock options in any calendar year (under all such plans of his employer corporation and its parent and subsidiary corporation) shall not exceed $100,000 plus any unused limit carryover to such year.”Enacted provision · exact public law section
(a) General Rule.— Subsection (b) of section 422A is amended by inserting “and” at the end of paragraph (6) and by striking out paragraphs (7) and (8) and inserting in lieu thereof the following new paragraph: “(7) under the terms of the plan, the aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the 1st time by such individual during any calendar year (under all such plans of the individual’s employer corporation and its parent and subsidiary corporations) shall not exceed $100,000.”Tax Reform Act of 1986
Pub. L. 99–514 § 321(b)(2) · 100 Stat. 2085
Substituted · 26 U.S.C. § 422(c)(1)
Pub. L. 99–514, § 321(b)(2), substituted “paragraph (7) of subsection (b)” for “paragraph (8) of subsection (b) and paragraph (4) of this subsection”
Source evidence
Code amendment note
Subsec. (c)(1). Pub. L. 99–514, § 321(b)(2), substituted “paragraph (7) of subsection (b)” for “paragraph (8) of subsection (b) and paragraph (4) of this subsection”.Enacted provision · exact public law section
(2) The last sentence of section 422A(c)(1) is amended by striking out “paragraph (8) of subsection (b) and paragraph (4) of this subsection” and inserting in lieu thereof “paragraph (7) of subsection (b)”.Tax Reform Act of 1986
Pub. L. 99–514 § 321(b)(1) · 100 Stat. 2085
Redesignated · 26 U.S.C. § 422(c)(4)
Pub. L. 99–514, § 321(b)(1), redesignated par. (5) as (4)
Struck · 26 U.S.C. § 422(c)(4)
Pub. L. 99–514, § 321(b)(1), struck out former par. (4) relating to carryover of unused limit
Source evidence
Code amendment note
Subsec. (c)(4). Pub. L. 99–514, § 321(b)(1), redesignated par. (5) as (4) and struck out former par. (4) relating to carryover of unused limit.Enacted provision · exact public law section
(1) Subsection (c) of section 422A is amended— (A) by striking out paragraphs (4) and (7), and (B) by redesignating paragraphs (5), (6), (8), (9), and (10) as paragraphs (4), (5), (6), (7), and (8), respectively.Tax Reform Act of 1986
Pub. L. 99–514 § 321(b)(1)(B) · 100 Stat. 2085
Redesignated · 26 U.S.C. § 422(c)(5); 26 U.S.C. § 422(c)(6)
Pub. L. 99–514, § 321(b)(1)(B), redesignated pars. (6) and (8) as (5) and (6), respectively. Former par. (5) redesignated (4)
Source evidence
Code amendment note
Subsec. (c)(5), (6). Pub. L. 99–514, § 321(b)(1)(B), redesignated pars. (6) and (8) as (5) and (6), respectively. Former par. (5) redesignated (4).Enacted provision · exact public law section
(B) by redesignating paragraphs (5), (6), (8), (9), and (10) as paragraphs (4), (5), (6), (7), and (8), respectively.Tax Reform Act of 1986
Pub. L. 99–514 § 321(b)(1) · 100 Stat. 2085
Redesignated · 26 U.S.C. § 422(c)(7)
Pub. L. 99–514, § 321(b)(1), redesignated par. (9) as (7)
Struck · 26 U.S.C. § 422(c)(7)
Pub. L. 99–514, § 321(b)(1), struck out former par. (7) which provided that for purposes of subsec. (b)(7) any incentive stock option be treated as outstanding until such option was exercised in full or expired by reason of lapse of time
Source evidence
Code amendment note
Subsec. (c)(7). Pub. L. 99–514, § 321(b)(1), redesignated par. (9) as (7) and struck out former par. (7) which provided that for purposes of subsec. (b)(7) any incentive stock option be treated as outstanding until such option was exercised in full or expired by reason of lapse of time.Enacted provision · exact public law section
(1) Subsection (c) of section 422A is amended— (A) by striking out paragraphs (4) and (7), and (B) by redesignating paragraphs (5), (6), (8), (9), and (10) as paragraphs (4), (5), (6), (7), and (8), respectively.Tax Reform Act of 1986
Pub. L. 99–514 § 321(b)(1)(B) · 100 Stat. 2085
Redesignated · 26 U.S.C. § 422(c)(8)
Pub. L. 99–514, § 321(b)(1)(B), redesignated par. (10) as (8). Former par. (8) redesignated (6)
Source evidence
Code amendment note
Subsec. (c)(8). Pub. L. 99–514, § 321(b)(1)(B), redesignated par. (10) as (8). Former par. (8) redesignated (6).Enacted provision · exact public law section
(B) by redesignating paragraphs (5), (6), (8), (9), and (10) as paragraphs (4), (5), (6), (7), and (8), respectively.Tax Reform Act of 1986
Pub. L. 99–514 § 321(b)(1)(B) · 100 Stat. 2085
Redesignated · 26 U.S.C. § 422(c)(9)
Pub. L. 99–514, § 321(b)(1)(B), redesignated par. (9) as (7)
Source evidence
Code amendment note
Subsec. (c)(9). Pub. L. 99–514, § 321(b)(1)(B), redesignated par. (9) as (7).Enacted provision · exact public law section
(B) by redesignating paragraphs (5), (6), (8), (9), and (10) as paragraphs (4), (5), (6), (7), and (8), respectively.Tax Reform Act of 1986
Pub. L. 99–514 § 1847(b)(5) · 100 Stat. 2085
Substituted · 26 U.S.C. § 422(c)(9)
Pub. L. 99–514, § 1847(b)(5), substituted “section 22(e)(3)” for “section 37(e)(3)”
Target inherited from the preceding amendment note.
Source evidence
Code amendment note
Pub. L. 99–514, § 1847(b)(5), substituted “section 22(e)(3)” for “section 37(e)(3)”.Enacted provision · exact public law section
(5) Paragraph (9) of section 422A(c) is amended by striking out “section 37(e)(3)” and inserting in lieu thereof “section 22(e)(3)”.Tax Reform Act of 1986
Pub. L. 99–514 § 321(b)(1)(B) · 100 Stat. 2085
Redesignated · 26 U.S.C. § 422(c)(10)
Pub. L. 99–514, § 321(b)(1)(B), redesignated par. (10) as (8)
Source evidence
Code amendment note
Subsec. (c)(10). Pub. L. 99–514, § 321(b)(1)(B), redesignated par. (10) as (8).Enacted provision · exact public law section
(B) by redesignating paragraphs (5), (6), (8), (9), and (10) as paragraphs (4), (5), (6), (7), and (8), respectively.Technical and Miscellaneous Revenue Act of 1988
Pub. L. 100–647 § 1003(d)(1)(A) · 102 Stat. 3342
Inserted · 26 U.S.C. § 422(b)
Pub. L. 100–647, § 1003(d)(1)(A), inserted at end “Such term shall not include any option if (as of the time the option is granted) the terms of such option provide that it will not be treated as an incentive stock option.”
Source evidence
Code amendment note
Subsec. (b). Pub. L. 100–647, § 1003(d)(1)(A), inserted at end “Such term shall not include any option if (as of the time the option is granted) the terms of such option provide that it will not be treated as an incentive stock option.”Enacted provision · exact public law section
(A) Subsection (b) of section 422A of the 1986 Code is amended by adding at the end thereof the following new sentence: “Such term shall not include any option if (as of the time the option is granted) the terms of such option provide that it will not be treated as an incentive stock option.”Technical and Miscellaneous Revenue Act of 1988
Pub. L. 100–647 § 1003(d)(2)(B) · 102 Stat. 3342
Struck · 26 U.S.C. § 422(b)(7)
Pub. L. 100–647, § 1003(d)(2)(B), struck out par. (7) which read as follows: “under the terms of the plan, the aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the 1st time by such individual during any calendar year (under all such plans of the individual’s employer corporation and its parent and subsidiary corporations) shall not exceed $100,000.”
Source evidence
Code amendment note
Subsec. (b)(7). Pub. L. 100–647, § 1003(d)(2)(B), struck out par. (7) which read as follows: “under the terms of the plan, the aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the 1st time by such individual during any calendar year (under all such plans of the individual’s employer corporation and its parent and subsidiary corporations) shall not exceed $100,000.”Enacted provision · exact public law section
(B) Subsection (b) of section 422A of the 1986 Code is amended by adding “and” at the end of paragraph (5), by striking out “; and” at the end of paragraph (6) and inserting in lieu thereof a period, and by striking out paragraph (7).Technical and Miscellaneous Revenue Act of 1988
Pub. L. 100–647 § 1003(d)(2)(C) · 102 Stat. 3342
Substituted · 26 U.S.C. § 422(c)(1)
Pub. L. 100–647, § 1003(d)(2)(C), substituted “subsection (d)” for “paragraph (7) of subsection (b)”
Source evidence
Code amendment note
Subsec. (c)(1). Pub. L. 100–647, § 1003(d)(2)(C), substituted “subsection (d)” for “paragraph (7) of subsection (b)”.Enacted provision · exact public law section
(C) Paragraph (1) of section 422A(c) of the 1986 Code is amended by striking out “paragraph (7) of subsection (b)” and inserting in lieu thereof “subsection (d)”.Technical and Miscellaneous Revenue Act of 1988
Pub. L. 100–647 § 1003(d)(2)(A) · 102 Stat. 3342
Added · 26 U.S.C. § 422(d)
Pub. L. 100–647, § 1003(d)(2)(A), added subsec. (d)
Source evidence
Code amendment note
Subsec. (d). Pub. L. 100–647, § 1003(d)(2)(A), added subsec. (d).Enacted provision · exact public law section
(A) Section 422A of the 1986 Code is amended by adding at the end thereof the following new subsection: “(d) $100,000 Per Year Limitation.— “(1) In general.— To the extent that the aggregate fair market value of stock with respect to which incentive stock options (determined without regard to this subsection) are exercisable for the 1st time by any individual during any calendar year (under all plans of the individual’s employer corporation and its parent and subsidiary corporations) exceeds $100,000, such options shall be treated as options which are not incentive stock options. “(2) Ordering rule.— Paragraph (1) shall be applied by taking options into account in the order in which they were granted. “(3) Determination of fair market value.— For purposes of paragraph (1), the fair market value of any stock shall be determined as of the time the option with respect to such stock is granted.”Revenue Reconciliation Act of 1990
Pub. L. 101–508 § 11801(c)(9)(A)(i) · 104 Stat. 1388
Changed · 26 U.S.C. § 422
Pub. L. 101–508, § 11801(c)(9)(A)(i), renumbered section 422A of this title as this section
Source evidence
Code amendment note
Pub. L. 101–508, § 11801(c)(9)(A)(i), renumbered section 422A of this title as this section.Enacted provision · exact public law section
(i) Section 422A is redesignated as section 422 and section 425 is redesignated as section 424.Revenue Reconciliation Act of 1990
Pub. L. 101–508 § 11801(c)(9)(C)(i) · 104 Stat. 1388
Substituted · 26 U.S.C. § 422(a)(2)
Pub. L. 101–508, § 11801(c)(9)(C)(i), substituted “424(a)” for “425(a)”
Source evidence
Code amendment note
Subsec. (a)(2). Pub. L. 101–508, § 11801(c)(9)(C)(i), substituted “424(a)” for “425(a)”.Enacted provision · exact public law section
(i) by striking “425(a)” in subsection (a)(2) and inserting “424(a)”, andRevenue Reconciliation Act of 1990
Pub. L. 101–508 § 11801(c)(9)(C)(ii) · 104 Stat. 1388
Redesignated · 26 U.S.C. § 422(c)(5)(8)
Pub. L. 101–508, § 11801(c)(9)(C)(ii), redesignated pars. (6) to (8) as (5) to (7), respectively
Struck · 26 U.S.C. § 422(c)(5)(8)
Pub. L. 101–508, § 11801(c)(9)(C)(ii), struck out former par. (5) “Coordination with sections 422 and 424” which read as follows: “Sections 422 and 424 shall not apply to an incentive stock option.”
Source evidence
Code amendment note
Subsec. (c)(5) to (8). Pub. L. 101–508, § 11801(c)(9)(C)(ii), redesignated pars. (6) to (8) as (5) to (7), respectively, and struck out former par. (5) “Coordination with sections 422 and 424” which read as follows: “Sections 422 and 424 shall not apply to an incentive stock option.”Enacted provision · exact public law section
(ii) by striking paragraph (5) of subsection (c) and by redesignating paragraphs (6), (7), and (8), of subsection (c) as paragraphs (5), (6), and (7), respectively.Pub. L. 115–97 title I § 13603(c)(1)(A) · 131 Stat. 2054
Inserted · 26 U.S.C. § 422(b)
Pub. L. 115–97 inserted at end of concluding provisions “Such term shall not include any option if an election is made under section 83(i) with respect to the stock received in connection with the exercise of such option.”
Source evidence
Code amendment note
Subsec. (b). Pub. L. 115–97 inserted at end of concluding provisions “Such term shall not include any option if an election is made under section 83(i) with respect to the stock received in connection with the exercise of such option.”Enacted provision · exact public law section
(A) Incentive stock options.— Section 422(b) is amended by adding at the end the following: “Such term shall not include any option if an election is made under section 83(i) with respect to the stock received in connection with the exercise of such option.”.Effective date note
Amendment by Pub. L. 115–97 applicable to stock attributable to options exercised, or restricted stock units settled, after Dec. 31, 2017, see section 13603(f)(1) of Pub. L. 115–97, set out as a note under section 83 of this title.
30 of 30 references resolved to an enrolled provision
Editorial Notes
Prior Provisions
A prior section 422, added Pub. L. 88–272, title II, § 221(a), , 78 Stat. 64; amended Pub. L. 94–455, title VI, § 603(a), (b), title XIX, § 1906(b)(13)(A), , 90 Stat. 1574, 1834; Pub. L. 96–589, § 6(i)(3), , 94 Stat. 3410, related to qualified stock options, prior to repeal by Pub. L. 101–508, title XI, § 11801(a)(20), , 104 Stat. 1388–521. For savings provision, see section 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title.
Amendments1983–2017 · 6 rounds
2017
Subsec. (b). Pub. L. 115–97 inserted at end of concluding provisions “Such term shall not include any option if an election is made under section 83(i) with respect to the stock received in connection with the exercise of such option.”
1990
Pub. L. 101–508, § 11801(c)(9)(A)(i), renumbered section 422A of this title as this section.
Subsec. (a)(2). Pub. L. 101–508, § 11801(c)(9)(C)(i), substituted “424(a)” for “425(a)”.
Subsec. (c)(5) to (8). Pub. L. 101–508, § 11801(c)(9)(C)(ii), redesignated pars. (6) to (8) as (5) to (7), respectively, and struck out former par. (5) “Coordination with sections 422 and 424” which read as follows: “Sections 422 and 424 shall not apply to an incentive stock option.”
1988
Subsec. (b). Pub. L. 100–647, § 1003(d)(1)(A), inserted at end “Such term shall not include any option if (as of the time the option is granted) the terms of such option provide that it will not be treated as an incentive stock option.”
Subsec. (b)(7). Pub. L. 100–647, § 1003(d)(2)(B), struck out par. (7) which read as follows: “under the terms of the plan, the aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the 1st time by such individual during any calendar year (under all such plans of the individual’s employer corporation and its parent and subsidiary corporations) shall not exceed $100,000.”
Subsec. (c)(1). Pub. L. 100–647, § 1003(d)(2)(C), substituted “subsection (d)” for “paragraph (7) of subsection (b)”.
Subsec. (d). Pub. L. 100–647, § 1003(d)(2)(A), added subsec. (d).
1986
Subsec. (b)(7). Pub. L. 99–514, § 321(a), added par. (7) and struck out former par. (7) which read as follows: “such option by its terms is not exercisable while there is outstanding (within the meaning of subsection (c)(7)) any incentive stock option which was granted, before the granting of such option, to such individual to purchase stock in his employer corporation or in a corporation which (at the time of the granting of such option) is a parent or subsidiary corporation of the employer corporation, or in a predecessor corporation of any of such corporations; and”.
Subsec. (b)(8). Pub. L. 99–514, § 321(a), struck out par. (8) which read as follows: “in the case of an option granted after , under the terms of the plan the aggregate fair market value (determined as of the time the option is granted) of the stock for which any employee may be granted incentive stock options in any calendar year (under all such plans of his employer corporation and its parent and subsidiary corporation) shall not exceed $100,000 plus any unused limit carryover to such year.”
Subsec. (c)(1). Pub. L. 99–514, § 321(b)(2), substituted “paragraph (7) of subsection (b)” for “paragraph (8) of subsection (b) and paragraph (4) of this subsection”.
Subsec. (c)(4). Pub. L. 99–514, § 321(b)(1), redesignated par. (5) as (4) and struck out former par. (4) relating to carryover of unused limit.
Subsec. (c)(5), (6). Pub. L. 99–514, § 321(b)(1)(B), redesignated pars. (6) and (8) as (5) and (6), respectively. Former par. (5) redesignated (4).
Subsec. (c)(7). Pub. L. 99–514, § 321(b)(1), redesignated par. (9) as (7) and struck out former par. (7) which provided that for purposes of subsec. (b)(7) any incentive stock option be treated as outstanding until such option was exercised in full or expired by reason of lapse of time.
Subsec. (c)(8). Pub. L. 99–514, § 321(b)(1)(B), redesignated par. (10) as (8). Former par. (8) redesignated (6).
Subsec. (c)(9). Pub. L. 99–514, § 321(b)(1)(B), redesignated par. (9) as (7).
Pub. L. 99–514, § 1847(b)(5), substituted “section 22(e)(3)” for “section 37(e)(3)”.
Subsec. (c)(10). Pub. L. 99–514, § 321(b)(1)(B), redesignated par. (10) as (8).
1984
Subsec. (c)(9). Pub. L. 98–369, § 2662(f)(1), substituted “section 37(e)(3)” for “section 105(d)(4)”.
Subsec. (c)(10). Pub. L. 98–369, § 555(a)(1), added par. (10).
1983
Subsec. (b)(8). Pub. L. 97–448, § 102(j)(1), substituted “granted incentive stock options” for “granted options”.
Subsec. (c)(1). Pub. L. 97–448, § 102(j)(2), substituted “Good faith efforts to value stock” for “Exercise of option when price is less than value of stock” as par. (1) heading and inserted sentence providing that, to the extent provided in regulations by the Secretary, a rule similar to that already enunciated in the paragraph applies for purposes of par. (8) of subsec. (b) and par. (4) of subsec. (c).
Subsec. (c)(2)(A). Pub. L. 97–448, § 102(j)(3), substituted “either of the periods” for “the 2-year period”.
Subsec. (c)(4)(A)(ii). Pub. L. 97–448, § 102(j)(4), substituted “granted incentive stock options” for “granted options”.
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by Pub. L. 115–97 applicable to stock attributable to options exercised, or restricted stock units settled, after , see section 13603(f)(1) of Pub. L. 115–97, set out as a note under section 83 of this title.
Effective Date of 1988 Amendment
Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.
Effective Date of 1986 Amendment
Pub. L. 99–514, title III, § 321(c), , 100 Stat. 2220, provided that: “The amendments made by this section [amending this section] shall apply to options granted after .”
Amendment by section 1847(b)(5) of Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title.
Effective Date of 1984 Amendment
Pub. L. 98–369, div. A, title V, § 555(c)(1), , 98 Stat. 898, as amended by Pub. L. 99–514, title XVIII, § 1855(a)(1), , 100 Stat. 2882, provided that: “The amendment made by subsection (a)(1) [amending this section] shall apply to options granted after , except that such subsection shall not apply to any incentive stock option granted before , pursuant to a plan adopted or corporate action taken by the board of directors of the grantor corporation before .”
Amendment by section 2662 of Pub. L. 98–369 effective as though included in the enactment of the Social Security Amendments of 1983, Pub. L. 98–21, see section 2664(a) of Pub. L. 98–369, set out as a note under section 401 of Title 42, The Public Health and Welfare.
Effective Date of 1983 Amendment
Amendment by Pub. L. 97–448 effective, except as otherwise provided, as if it had been included in the provision of the Economic Recovery Tax Act of 1981, Pub. L. 97–34, to which such amendment relates, see section 109 of Pub. L. 97–448, set out as a note under section 1 of this title.
Effective Date
Pub. L. 97–34, title II, § 251(c), , 95 Stat. 259, as amended by Pub. L. 99–514, § 2, , 100 Stat. 2095, provided that:
“(1) Options to which section applies.—
“(A) In general.—
Except as provided in subparagraph (B), the amendments made by this section [enacting this section and amending sections 421, 425 [now 424], and 6039 of this title] shall apply with respect to options granted on or after , and exercised on or after , or outstanding on such date.
“(B) Election and designation of options.—
In the case of an option granted before , the amendments made by this section shall apply only if the corporation granting such option elects (in the manner and at the time prescribed by the Secretary of the Treasury or his delegate) to have the amendments made by this section apply to such option. The aggregate fair market value (determined at the time the option is granted) of the stock for which any employee was granted options (under all plans of his employer corporation and its parent and subsidiary corporations) to which the amendments made by this section apply by reason of this subparagraph shall not exceed $50,000 per calendar year ans shall not exceed $200,000 in the aggregate.
“(2) Changes in terms of options.—
In the case of an option granted on or after , and outstanding on the date of the enactment of this Act [], paragraph (1) of section 425(h) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] shall not apply to any change in the terms of such option (or the terms of the plan under which granted, including shareholder approval) made within 1 year after such date of enactment to permit such option to qualify as a incentive stock option.”
Savings Provision
For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to , for purposes of determining liability for tax for periods ending after , see section 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title.
Treatment of Options as Incentive Stock Options
Pub. L. 100–647, title I, § 1003(d)(1)(B), , 102 Stat. 3384, provided that: “In the case of an option granted after , and on or before the date of the enactment of this Act [], such option shall not be treated as an incentive stock option if the terms of such option are amended before the date 90 days after such date of enactment to provide that such option will not be treated as an incentive stock option.”
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after , see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.
Credits
1981–2017 · 7 acts
- 1981Added Pub. L. 97–34, title II, § 251(a), , 95 Stat. 256, § 422A
- 1983amended Pub. L. 97–448, title I, § 102(j)(1)–(4), , 96 Stat. 2373
- 1984Pub. L. 98–369, div. A, title V, § 555(a)(1), div. B, title VI, § 2662(f)(1), , 98 Stat. 897, 1159
- 1986Pub. L. 99–514, title III, § 321(a), (b), title XVIII, § 1847(b)(5), , 100 Stat. 2220, 2856
- 1988Pub. L. 100–647, title I, § 1003(d)(1)(A), (2), , 102 Stat. 3384
- 1990renumbered § 422 and amended Pub. L. 101–508, title XI, § 11801(c)(9)(A)(i), (C), , 104 Stat. 1388–524, 1388–525
- 2017Pub. L. 115–97, title I, § 13603(c)(1)(A), , 131 Stat. 2163.
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(Added Pub. L. 97–34, title II, § 251(a), , 95 Stat. 256, § 422A; amended Pub. L. 97–448, title I, § 102(j)(1)–(4), , 96 Stat. 2373; Pub. L. 98–369, div. A, title V, § 555(a)(1), div. B, title VI, § 2662(f)(1), , 98 Stat. 897, 1159; Pub. L. 99–514, title III, § 321(a), (b), title XVIII, § 1847(b)(5), , 100 Stat. 2220, 2856; Pub. L. 100–647, title I, § 1003(d)(1)(A), (2), , 102 Stat. 3384; renumbered § 422 and amended Pub. L. 101–508, title XI, § 11801(c)(9)(A)(i), (C), , 104 Stat. 1388–524, 1388–525; Pub. L. 115–97, title I, § 13603(c)(1)(A), , 131 Stat. 2163.)