TL;DR

• The Rule. ISOs that become exercisable beyond $100K per year (based on grant-date 409A FMV) are taxed as NSOs.
• The Risk. Without managing this properly, you can trigger IRS filing errors, unexpected taxes for employees, and lasting damage to your company's reputation.
• The Fix. Slice handles the entire process - splitting grants, tracking limits, managing exercises and reporting outcomes.
• The Result. You scheduled a demo and now the $100K limit as well as cross-border exercise flows are off your plate; Slice handles it all, end-to-end, in just a few clicks.

The Pain: Small Oversight, Big Problem

Equity compensation is one of the most powerful tools companies can use to attract, retain and motivate talent. But with that opportunity comes great responsibility. Especially when Incentive Stock Options (ISOs) are involved.

Most equity teams already know ISOs carry unique tax advantages. But what often goes overlooked is a small section of the tax code that can cause outsized problems: the $100K rule.

At first glance, it doesn’t seem like much. But if you're issuing or managing ISOs and not keeping a close eye on this rule, you're opening the door to compliance gaps, tax reporting errors, missed withholding obligations and costly misunderstandings with your employees.

And this isn’t just a problem for large grants. Even routine awards can unintentionally cross the line.

The Rule: What the $100K Limit Actually Means

Here’s the core of the $100k rule:

Under IRS Section 422(d), each employee may only have $100,000 worth of ISOs become exercisable in any single calendar year, based on the fair market value at the time of grant as determined by the company’s 409A valuation. This limit applies even when early exercisability, cliffs, or accelerations cause a larger portion of the award to become exercisable in that year

If the amount of ISOs scheduled to vest and become exercisable in a year exceeds the $100,000 threshold, the IRS draws a hard line. The excess isn’t treated as an ISO anymore. Instead, the remainder become Nonqualified Stock Options (NSOs), with less beneficial tax treatment, different reporting, and different compliance obligations.

To be clear:

• The $100K limit isn’t about what employees exercise, but what can be exercised, based on the vesting schedule, under the ISO tax treatment
• .It’s not per grant. It’s cumulative across all ISO grants for that employee.
• It’s not measured by the purchase price, it’s based on the 409A FMV at the time of grant.
  

So even one medium-sized grant with a short vesting schedule can unintentionally cross the $100k limit. 

Why This Rule Matters More Than You Think

The IRS doesn’t give leeway on the $100K limit. If it’s not tracked properly, the consequences show up as tax bills, reporting errors, and employee frustration.

Here's what can happen if you're not compliant:

‍

• ‍Unexpected tax bills for employees: ISOs offer potential tax deferral and long-term capital gains treatment, meaning no taxes are due upon exercise, and nothing is owed until the stock is sold. But once the $100K limit is exceeded, the excess becomes NQSOs, which are taxable at exercise. Employees assuming they'll owe nothing until sale may be caught off guard when taxes are suddenly due upfront.
• ‍Withholding failures: ISOs don’t require income tax withholding at exercise. NSOs do. Misclassification can result in under-withheld taxes, penalties, and IRS scrutiny for both the company and the individual.
• ‍Reporting mistakes: ISOs are reported on Form 3921. NSOs affect Form W-2. Getting that wrong throws off both employee tax filings and company reporting, errors you may not catch until year-end or during due diligence processes, when it’s expensive and frustrating to correct.
• ‍Erosion of trust: When employees don’t understand why their option exercise suddenly triggered unexpected tax or paperwork, they come back to HR, payroll, or finance looking for answers. And if the reason was something preventable, that trust is hard to win back.
  

The Solution: Slice Handles the $100K Split So You Don’t Have To

Tracking and managing the $100K limit manually—across grants, years, and employees—just isn’t scalable. And the more your team grows, the harder it becomes to spot issues before they turn into problems.

At Slice, we built our platform with this reality in mind. Compliance shouldn’t be a bottleneck—(or a blind spot). That’s why the $100K rule is baked into our core logic. No spreadsheets. No guesswork. No last-minute cleanup.

Here’s how it works:

1. Intelligent ISO/NSO Split at Grant

Slice automatically analyzes the FMV at grant and the vesting schedule of every ISO.

If any portion of the grant would cause an employee to exceed the $100K threshold in a given year, Slice splits the grant in real-time: The ISO-eligible portion stays intact, and the excess is treated instantly as NSOs, as described below.

There’s no need to calculate or second-guess. The split is clear and immediate, and it’s tracked on the grant record.

→ You stay compliant from day one, without spreadsheets or manual tracking.

2. Real-Time Alerts for Risky Grants

Slice doesn’t wait until tax season to flag problems.

The system actively monitors every ISO grant across your company and gives you compliance alerts before board approval, so you can now simulate how future grants impact an employee’s $100K limit and tailor offers to optimize taxation. If a grant bumps up against the threshold or if a key data point like your 409A is missing or outdated—you’ll know right away.

→ You get early warnings, not late regrets.

3. Built-in Guardrails at Exercise and Clear Communication with Employees

The 100K limit doesn’t just matter at grant. It matters even more at exercise.

Slice brings ISO/NSO logic directly into the exercise experience: In the exercise workflow, employees see their available ISO and NSO units according to the $100K rule, so they are actively aware how many ISOs and NSOs they want to exercise.

→ You increase transparency, prevent surprises, and build trust.

4. Clean Reporting for Finance and Legal

One of the toughest parts of ISO compliance is explaining it to employees. Since each grant record clearly shows which options are ISOs and which are NSOs - Slice makes that easier on the company, too.

At the end of the year—or in the middle of a deal—clarity matters. Slice’s reporting tools give your finance and legal teams a precise breakdown of ISO and NSO activity, across the entire company.

Everything is logged, everything is audit-ready, and everything aligns with IRS rules and equity plan requirements.

→ You avoid rework and stay prepared for anything.

The Ask: A Better Way to Handle a Critical Rule

The $100K ISO rule may be buried deep in the tax code, but it’s one of those regulations that can come back to bite you if you’re not careful.

And the truth is, no one has time to babysit vesting schedules and IRS thresholds across thousands, or even hundreds, of employees. That’s not a good use of your time. And it’s not scalable.

Slice gives you the confidence that it’s done right, automatically. Every grant. Every time.

Want to see how?

[Book a demo] and we’ll walk you through how Slice simplifies compliance, so you can get back to building the company you set out to create.