If you meet these two standards, the total realized profit between the grant price and the final sales price (times the number of shares sold) is subject to long-term capital gains tax. The final sale of the stock occurs at least 1 year past the exercise date.The final sale of the stock occurs at least 2 years past the grant date.The alternative, of course, is to earn the right to capture your profit at long-term capital gains tax rates - which are lower than ordinary income.īut how do you secure that lower rate? You need a qualifying disposition, which you can secure if you meet both of the following standards: Is a Disqualifying Disposition A Good Idea?Įven though you may pay a higher tax rate by selling your incentive stock options as a disqualifying disposition, you may not want to completely discount the benefits of an exercise and sell quite yet.You May Still Be Able to Participate in the Upside of the Company Stock.A Disqualifying Disposition Could Lead to a Reduced Position in Company Stock.You Might Owe the Same in Taxes Regardless of Disposition Type.
A Disqualifying Disposition May Help You Manage Cash Flow.A Disqualifying Disposition of Incentive Stock Options Allows to You Immediately Capture Potential Profits.Think Beyond Taxes Before Deciding on a Strategy for Exercising Incentive Stock Options.Last Updated on by Daniel Zajac, CFP®, EA Leave a Comment Making the decision to own a large amount of stock in one company should be done carefully as part of a broader risk assessment and financial plan.ĥ Reasons Why You Might Want a Disqualifying Disposition for Your Incentive Stock Options.A disqualifying disposition may make more sense when you owe a similar amount in taxes either way in order to avoid concentration risk.
Splitting the sale of your shares between qualifying and disqualifying dispositions can aid in cash flow to cover tax costs while still allowing you to benefit from favorable company gains long-term.
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