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. Employee Stock Purchase Plan - ...

    A company-run program in which participating employees can purchase ...
  3. Non-Qualified Stock Option - NSO

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

    The issuance of an award, such as a stock option, to key employees ...
  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. Managing Wealth

    Introduction To Incentive Stock Options

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

    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. Managing Wealth

    Introduction To Employee Stock Purchase Plans

    ESPPs offer a very straightforward method of allowing employees to participate in the overall profitability of their employers.
  4. Managing Wealth

    Get The Most Out Of Employee Stock Options

    These plans can be lucrative for employees - if they know how to avoid unnecessary taxes.
  5. Investing

    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.
  6. Managing Wealth

    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. Investing

    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.
  8. Financial Advisor

    The 401(k) and Qualified Plans Tutorial

    Learn about eligibility requirements, contributions and distribution rules for these retirement plans.
  9. Retirement

    Comparing Qualified And Non-Qualified Plans

    Qualified and non-qualified retirement plans are created by employers to benefit their employees.
  10. Financial Advisor

    Beware Of Company Stock In Qualified Plans

    While this strategy does have a few advantages, it can also pose some substantial risks to employees.
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 >>
Trading Center