Tax implications of transferring ISO exercised shares to a child

If you are employed for a company that issues ISO, then I would assume that there would be someone sophisticated to provide some additional guidance.  I would recommend that you speak with such an individual to confirm that you are able to "transfer" such stock to someone outside of the company.

Assuming you are able to "transfer" the stock, you would have a taxable event.

With an ISO, there are specific rules that govern favorable tax treatment.  Both of the following must be met:

1. The sale of the stock occurs at least two years past the grant date, and
2. The sale of the stock occurs at least one year past the exercise date.

The above is known as a qualifying disposition (and also holding period).  Anything outside of that, is a disqualifying disposition; including a gift.  With a disqualifying disposition you will have ordinary income treatment equal to your bargain element.  This will be reported on your W-2.

You now have a "new" basis in the stock and this will be the basis to your child.  

You may also have a gift tax return filing requirement.