Qualifying Disposition

DEFINITION of '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.

BREAKING DOWN '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.

RELATED TERMS
  1. Incentive Stock Option - ISO

    A type of employee stock option with a tax benefit, when you ...
  2. Non-Qualified Stock Option - NSO

    A type of employee stock option where you pay ordinary income ...
  3. Grant

    The issuance of an award, such as a stock option, to key employees ...
  4. Employee Stock Purchase Plan - ...

    A company-run program in which participating employees can purchase ...
  5. Statutory Stock Option

    Also known as incentive stock options, this type of employee ...
  6. ISO 14001

    One of the subsets of ISO 14000. ISO 14001 pertains specifically ...
Related Articles
  1. Investing Basics

    Introduction To Incentive Stock Options

    Here are some basic highlights of how ISOs work and the ways they can be used.
  2. Options & Futures

    How Are Stock Options Taxed & Reported?

    That depends on the type of stock option you have. A rundown of the tax treatment for statutory and nonstatutory, or non-qualified, options.
  3. Investing Basics

    A Beginner's Guide to Investing in Company Stock Plans

    There are certain advantages to investing in your employer's stock but there are some potential drawbacks to be aware of.
  4. Professionals

    Introduction

    CFP Online Study Guide - Employee Benefits Planning - Employee Stock Options
  5. Professionals

    Introduction

    CFP Online Study Guide - Employee Benefits Planning - Stock Plans
  6. Executive Compensation

    Get The Most Out Of Employee Stock Options

    Many corporations encourage employees to participate in the company’s growth by offering them a piece of the pie. That means employee stock options.
  7. Professionals

    Employee Stock Options

    Employee Stock Options
  8. Investing Basics

    What is a Stock Option?

    An employee stock option is a right given to an employee to buy a certain number of company stock shares at a certain time and price in the future.
  9. Taxes

    401(k) And Qualified Plans: Introduction

    By Denise ApplebyDuring retirement years, income for retirees usually comes from three primary sources: Social Security benefits The regular savings account of the retiree Retirement-plan ...
  10. Professionals

    Incentive Stock Options

    CFP Online Study Guide - Employee Benefits Planning - Incentive Stock Options
RELATED FAQS
  1. What are employee share purchase plans?

    Find out what an employee stock purchase plan is and how it can be advantageous for an employer and an employee to participate ... Read Answer >>
  2. What are the SEC regulations on exercising stock options?

    Learn how the SEC and IRS regulate employee stock options, including the exercise of options and the sale of options, and ... Read Answer >>
  3. How can I purchase stocks directly from a company?

    There are a few circumstances in which a person can buy stock directly from a company. The following is meant to cover some ... Read Answer >>
  4. What is the difference between qualified and non-qualified plans?

    Qualified and non-qualified retirement plans are created by employers with the intent of benefiting employees. The Employee ... Read Answer >>
  5. How do restricted stocks, treasury stocks and stock appreciation rights benefit employees?

    Restricted stock represents any equity that is conditionally given or sold to an insider as compensation or as part of an ... Read Answer >>
  6. How are stock warrants different from stock options?

    A stock option is a contract between two people that gives the holder the right, but not the obligation, to buy or sell outstanding ... Read Answer >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center