What is ‘Qualifying Disposition’
A sale, transfer or exchange of stock obtained through a qualified stock option incentive plan, namely incentive stock option (ISO) plans and employee stock purchase plans (ESPP), that qualifies for favorable tax treatment for the employee selling the stock. In order to be a qualifying disposition, the employee must sell at least one year after receiving the stock, and two years after receiving the incentive stock option (ISO), or the beginning of the ESPP offering period.
The capital gains treatment for a qualifying disposition only applies to the amount of the sale represented by the difference between the exercise price of the option’s stock and the market price at which the stock was sold.
Explaining ‘Qualifying Disposition’
Non-statutory stock options (NSOs) do not qualify for capital gains tax treatment, and are always taxed at ordinary income rates. Some companies do not offer ISOs because, in contrast to non-statutory (or non-qualified) option plans, there is no tax deduction for the company when the options are exercised.
Further Reading
- Disqualifying dispositions of incentive stock options: Tax benefits versus financial reporting costs – www.jstor.org [PDF]
- Stakeholders model of governance in Islamic economic system – papers.ssrn.com [PDF]
- Selling losers and keeping winners: How (savings) goal dynamics predict a reversal of the disposition effect – link.springer.com [PDF]
- Sunny Dispositions: Modernizing Investment Tax Credit Recapture Rules for Solar Energy Project Finance after the American Recovery and Reinvestment Act – heinonline.org [PDF]
- Fear and greed in financial markets: A clinical study of day-traders – pubs.aeaweb.org [PDF]
- Financial Options in the Real World: An Economic and Tax Analysis – heinonline.org [PDF]
- The Judicial Role in Derivative Taxation: The Queen v. Shell Canada Limited and Financial Contract Economics – heinonline.org [PDF]
- Disposition effect and herding behavior in the cryptocurrency market – link.springer.com [PDF]
- Prudence or discrimination? Emergency measures, the global financial crisis and international economic law – academic.oup.com [PDF]
