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Qualifying Disposition

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]
… occurred between 1979 and 1981, with the introduction of ISOs in the Economic Recovery Tax … conversions: 2 were on the ECR list, 1 was a dis- qualifying disposition, 1 was … low frequency of conversion, we focus our discussion and empir- ical tests on disqualifying dispositions …

Stakeholders model of governance in Islamic economic systemStakeholders model of governance in Islamic economic system
papers.ssrn.com [PDF]
… occurred between 1979 and 1981, with the introduction of ISOs in the Economic Recovery Tax … conversions: 2 were on the ECR list, 1 was a dis- qualifying disposition, 1 was … low frequency of conversion, we focus our discussion and empir- ical tests on disqualifying dispositions …

Selling losers and keeping winners: How (savings) goal dynamics predict a reversal of the disposition effectSelling losers and keeping winners: How (savings) goal dynamics predict a reversal of the disposition effect
link.springer.com [PDF]
… occurred between 1979 and 1981, with the introduction of ISOs in the Economic Recovery Tax … conversions: 2 were on the ECR list, 1 was a dis- qualifying disposition, 1 was … low frequency of conversion, we focus our discussion and empir- ical tests on disqualifying dispositions …

Sunny Dispositions: Modernizing Investment Tax Credit Recapture Rules for Solar Energy Project Finance after the American Recovery and Reinvestment ActSunny Dispositions: Modernizing Investment Tax Credit Recapture Rules for Solar Energy Project Finance after the American Recovery and Reinvestment Act
heinonline.org [PDF]
… occurred between 1979 and 1981, with the introduction of ISOs in the Economic Recovery Tax … conversions: 2 were on the ECR list, 1 was a dis- qualifying disposition, 1 was … low frequency of conversion, we focus our discussion and empir- ical tests on disqualifying dispositions …

Fear and greed in financial markets: A clinical study of day-tradersFear and greed in financial markets: A clinical study of day-traders
pubs.aeaweb.org [PDF]
… occurred between 1979 and 1981, with the introduction of ISOs in the Economic Recovery Tax … conversions: 2 were on the ECR list, 1 was a dis- qualifying disposition, 1 was … low frequency of conversion, we focus our discussion and empir- ical tests on disqualifying dispositions …

Financial Options in the Real World: An Economic and Tax AnalysisFinancial Options in the Real World: An Economic and Tax Analysis
heinonline.org [PDF]
… occurred between 1979 and 1981, with the introduction of ISOs in the Economic Recovery Tax … conversions: 2 were on the ECR list, 1 was a dis- qualifying disposition, 1 was … low frequency of conversion, we focus our discussion and empir- ical tests on disqualifying dispositions …

The Judicial Role in Derivative Taxation: The Queen v. Shell Canada Limited and Financial Contract EconomicsThe Judicial Role in Derivative Taxation: The Queen v. Shell Canada Limited and Financial Contract Economics
heinonline.org [PDF]
… occurred between 1979 and 1981, with the introduction of ISOs in the Economic Recovery Tax … conversions: 2 were on the ECR list, 1 was a dis- qualifying disposition, 1 was … low frequency of conversion, we focus our discussion and empir- ical tests on disqualifying dispositions …

Disposition effect and herding behavior in the cryptocurrency marketDisposition effect and herding behavior in the cryptocurrency market
link.springer.com [PDF]
… occurred between 1979 and 1981, with the introduction of ISOs in the Economic Recovery Tax … conversions: 2 were on the ECR list, 1 was a dis- qualifying disposition, 1 was … low frequency of conversion, we focus our discussion and empir- ical tests on disqualifying dispositions …

Prudence or discrimination? Emergency measures, the global financial crisis and international economic lawPrudence or discrimination? Emergency measures, the global financial crisis and international economic law
academic.oup.com [PDF]
… occurred between 1979 and 1981, with the introduction of ISOs in the Economic Recovery Tax … conversions: 2 were on the ECR list, 1 was a dis- qualifying disposition, 1 was … low frequency of conversion, we focus our discussion and empir- ical tests on disqualifying dispositions …



Q&A About Qualifying Disposition


Can you explain why companies sometimes choose not to offer ISOs because there is no deduction available when employees exercise them ?

Some companies do not offer ISOs because they have no deduction available when employees exercise them .

How do you calculate your AMTI with respect to an employee stock purchase plan?

First, add up all of your ordinary income from all sources, including wages, interest on bonds or notes issued by individuals or corporations, dividends on stocks or mutual funds held more than one year, capital gains from sales of property other than inventory items sold at retail, etc., then subtract any adjustments such as IRA deductions or alimony payments made out of your paycheck. Next multiply this number by 25% if it exceeds $50k ($25k if married filing separately). Finally subtract this amount from your total income before calculating AMT using Form 6251 (line 8) as shown below. If you have no AMTI after taking into account these steps then there will be no AMT due and you should not complete Form 6251 Part III line 9(d). If there are any excess credits left over after completing Form 6251 Part III line 9(d) then those amounts may be carried forward to future years until they are used up entirely (see instructions page 14).

What are the two types of plans that qualify for favorable tax treatment?

The two types of plans that qualify for favorable tax treatment are ISO plans and ESPP plans.

Where can you find information about the bargain element for NSO in IRS publications?

You can find information about the bargain element for NSO in 26 USC 423 and Publication 525 (22), Taxable and Nontaxable Income respectively.

What is a Qualifying Disposition?

A qualifying disposition is the sale of stock that was acquired through an employee stock purchase plan.

How long after receiving the stock must an employee sell in order to be eligible for capital gains tax treatment?

At least one year after receiving the stock.

What is a qualifying disposition?

A qualifying disposition is a sale, transfer or exchange of stock obtained through a qualified stock option incentive plan.

How long after beginning an offering period must an employee purchase shares in order to be eligible for capital gains tax treatment?

Two years after beginning an offering period.

What is the bargain element for NSOs?

The bargain element for NSOs are added to an individual's alternative minimum taxable income, which has a flat tax meant to ensure everyone pays their fair share of taxes despite tax minimization strategies.

How long after receiving the incentive stock option (ISO) must an employee sell in order to be eligible for capital gains tax treatment?

At least one year after receiving the ISO.

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