The difference is when you exercise NSOs, you also have to pay withholding tax (ordinary income tax rate) to the company who then pays it to the IRS. For ISOs,

The difference is when you exercise NSOs, you also have to pay withholding tax (ordinary income tax rate) to the company who then pays it to the IRS. For ISOs, you don't have to pay tax at exercise, but you may be subject to Alternative Minimum Tax (AMT) especially if you have a large spread between your strike price and the fair market value at the time of exercise. (http://employeestockoptions.com/amttax/ http://employeestockoptions.com/amttax/ for more information about AMT)