An incentive stock option (ISO) is a type of employee stock option that is eligible for favourable tax treatment in the United States. ISOs are granted to employees as a form of long-term incentive intended to encourage them to stay with the company and contribute to its success.

ISOs have several tax advantages compared to other types of stock options. One of the main advantages is that the employee does not have to pay any income tax on the difference between the option exercise price and the fair market value of the stock when the option is exercised (i.e., when the employee buys the stock using the option). This difference is known as the "bargain element."

Instead, the bargain element is taxed as a capital gain when the employee sells the stock. If the stock is held for at least one year from the date of exercise and two years from the date of the grant, the capital gain is taxed at the lower long-term capital gains rate.

There are certain restrictions on ISOs, including limits on the amount of stock that can be granted and the length of time that the options must be held before they can be exercised. If these restrictions are not met, the ISOs may lose their favourable tax treatment and be treated as non-qualified stock options.

If you have been granted ISOs or are considering accepting them as part of your compensation package, it is a good idea to understand the tax implications and to consult with a tax professional to ensure that you are in compliance with the relevant laws and regulations.