The 90-day exercise window
Why departing employees get 90 days: the ISO three-month rule, and what happens after it.
An ISO holder must be an employee from the grant until three months before exercising. So a departing employee who wants ISO treatment has three months to exercise; options exercised later are taxed as NSOs. That is where the common 90-day post-termination exercise period comes from. A plan may allow longer — the options remain valid, but lose ISO treatment after the three months.
June 30, 2028
Priya Shah's last day at Northwind; her vested options stop vesting
September 30, 2028
Last day to exercise and keep ISO treatment
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- Federal statute
- 26 U.S.C. §422(a)(2) (opens in a new tab)An ISO holder must be an employee until three months before exerciseFree to read
- IRS guidance
- IRS Topic No. 427, Stock options (opens in a new tab)ISOs at grant and exercise, NSOs at exercise, and the AMTFree to read
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Post-termination exercise periodHow long a departing holder has to exercise vested options before they lapse — often 90 days, because an ISO exercised more than three months after employment ends is taxed as an NSO. A plan may allow longer; the options then lose ISO treatment, not validity
- Incentive stock optionA stock option meeting IRC §422: employees only, granted under a stockholder-approved plan, strike at least fair market value, exercisable for no more than ten years. No regular tax at grant or exercise (the spread can trigger AMT); gain is capital if the stock is held two years from grant and one from exercise. Only $100,000 of stock, valued at grant, may first become exercisable in a calendar year