Which type of stock option allows for delayed tax recognition until exercise?

The correct answer pertains to incentive stock options (ISOs), which are designed to provide favorable tax treatment under specific conditions. When an employee is granted ISOs, they do not have to recognize any income for tax purposes at the time of the option's grant or even when the options are vested. Tax recognition occurs only when the employee exercises the option to purchase the stock.

This structure is beneficial for employees because they can hold onto the options until they're ready to exercise them, potentially benefiting from appreciation in the stock's value without the tax implications that typically accompany other types of stock options at the time they are granted or vested. Moreover, if certain conditions are met after exercising an ISO—specifically holding the stock for a required period—the gains can also be subject to favorable capital gains tax rates rather than ordinary income rates, making it a beneficial compensation tool for employees.

In contrast, nonqualified stock options and other forms of stock compensation (like employee stock purchase plans and stock appreciation rights) usually result in immediate tax obligations at the time they are exercised or when the stock is sold. These options do not carry the same favorable tax deferrals that ISOs offer.