Confused about ISO qualifying vs disqualifying disposition - conflicting info everywhere!
I'm really struggling to make sense of the rules around Incentive Stock Options (ISOs) and what counts as a qualifying vs disqualifying disposition. The information online seems to contradict itself and I'm worried about the tax implications. Some websites say "A qualifying disposition is a sale of shares greater than two years after the ISO grant date AND one year after the exercise date." That "AND" makes me think both conditions need to be met. But then other sites say "The holding period requirement is satisfied if the taxpayer does not sell the stock until the end of the later of the 1-year period after the stock was transferred to the taxpayer or the 2-year period after the option was granted." Here's my situation: I received ISOs back in 2018, exercised them in November 2023, and then sold the shares in September 2024. So that's way more than two years after the grant, but less than a year after exercise. Does anyone know for sure if this would be considered a qualifying or disqualifying disposition? I need to figure this out for my 2025 taxes and don't want to mess anything up.
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Zainab Yusuf
The wording can definitely be confusing, but let me clear this up. For ISO treatment to be "qualifying," you must meet BOTH time requirements: 1) Hold the shares for more than 1 year after exercise 2) Sell the shares more than 2 years after the grant date In your case, while you've met the second requirement (sold more than 2 years after grant), you haven't met the first requirement (holding for more than 1 year after exercise). Since you exercised in November 2023 and sold in September 2024, that's less than a year. This means your transaction would be considered a disqualifying disposition. The tax implications are that the "bargain element" (the difference between your exercise price and fair market value at exercise) will be taxed as ordinary income rather than as capital gains.
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Miguel Alvarez
•Thanks for explaining! So to confirm, both conditions MUST be met for it to be qualifying? The wording about "the later of the two periods" was what confused me, since my sale was definitely after the 2-year grant period. So I'm guessing this means I'll owe ordinary income tax on the difference between what I paid for the shares and what they were worth when I exercised them. And then capital gains on any additional growth from exercise to sale?
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Zainab Yusuf
•Yes, both conditions must be met simultaneously for an ISO to receive the favorable tax treatment of a qualifying disposition. The "later of the two periods" wording refers to which date starts your holding period, not which requirement takes precedence. That's exactly right about the tax treatment. The "bargain element" (difference between exercise price and fair market value on exercise date) will be treated as ordinary income on your 2025 tax return. Then any additional gain or loss from the exercise date to your sale date will be treated as short-term capital gain/loss since you held the shares for less than a year after exercise.
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Connor O'Reilly
After spending countless hours researching ISO tax rules for my own situation, I stumbled across https://taxr.ai which literally saved me from making a huge mistake with my stock options. You upload your documents and it analyzes everything for you - grant dates, exercise dates, sale dates, and tells you exactly how each transaction will be taxed. I was in a similar situation where I exercised some ISOs granted years ago but sold them within 10 months and wasn't sure how to report it. The tool confirmed it was a disqualifying disposition and showed me exactly which forms I needed and how to fill them out. It even explained the AMT implications that I hadn't considered.
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Yara Khoury
•That sounds interesting but how reliable is it? Does it actually connect with tax professionals or is it just some automated system? I've had bad experiences with tax software that oversimplifies complex situations.
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Keisha Taylor
•I'm curious too. Can it handle more complex situations? Like if you have multiple grants with different exercise dates and partial sales? My ISO situation is a mess with exercises spanning 3 different tax years.
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Connor O'Reilly
•It's an AI-powered system built specifically for equity compensation - much more specialized than general tax software. It doesn't connect you with professionals directly, but it's designed by tax experts who understand all the ISO rules. Yes, it absolutely handles complex situations with multiple grants, partial exercises, and sales across different tax years. That's actually where it shines compared to general tax software. You can upload your grant documents, Form 3921s, and transaction history, and it maps everything out visually so you can see exactly what's happening with each batch of shares.
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Keisha Taylor
Just wanted to follow up after trying taxr.ai that someone mentioned. I finally got clarity on my ISO mess! I uploaded my equity documents (which I'd been avoiding dealing with for months) and within minutes had a clear breakdown of my qualifying vs disqualifying dispositions. The thing that surprised me was discovering I had actually miscalculated the exercise date on one of my grants, which would have led to incorrectly reporting it on my taxes. The timeline visualization made it super obvious where I'd made the mistake. It also saved me hours I would have spent in spreadsheets trying to match up grants, exercises and sales. Definitely recommend it if you're confused about ISO tax treatment like I was.
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StardustSeeker
After numerous failed attempts trying to reach someone at the IRS who could give me a definitive answer about ISO treatment (literally spent hours on hold), I found https://claimyr.com which got me connected to an actual IRS agent in under 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed exactly what others have said - you need BOTH time requirements for qualifying treatment. She also explained that since my situation involved a disqualifying disposition, I needed to make sure my employer properly reported the ordinary income portion on my W-2, and if they didn't, I would need to report it separately on my return. Saved me from potential issues down the road!
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Paolo Marino
•Wait, so this service just gets you through to an IRS agent faster? How does that even work? I thought everyone had to wait in the same queue.
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Amina Bah
•This sounds too good to be true. The IRS phone lines are notoriously impossible to get through. Are you sure they're providing legitimate access and not just connecting you with some third-party "tax experts" pretending to be IRS?
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StardustSeeker
•It uses an automated system that continuously calls the IRS and navigates the phone tree for you. When it finally gets through to an agent, it calls you and connects you. It's completely legitimate - you're speaking with actual IRS employees. Yes, it's 100% connecting you with real IRS agents. When you get connected, you're on an official IRS call - same verification process, same authority to access your tax records and provide official guidance. The service just handles the frustrating wait time part. The IRS doesn't offer any "priority" service themselves, but they don't prohibit systems that help people navigate their phone system either.
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Amina Bah
I was totally skeptical about Claimyr when I first read about it here, but I was desperate after trying for THREE DAYS to reach someone at the IRS about my ISO reporting question. Amazingly, it actually worked! Got connected to an IRS tax specialist in about 15 minutes who looked up my specific situation. The agent explained that my brokerage statement wasn't properly showing the compensation element of my disqualifying disposition and walked me through exactly how to reconcile the difference on my return. She also confirmed I need to watch for a potential W-2 adjustment from my former employer. Definitely worth it just for the peace of mind of having official guidance directly from the IRS rather than trying to interpret conflicting information online.
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Oliver Becker
Don't forget about the AMT implications with ISOs! Even if you have a disqualifying disposition, you might still need to figure out if you paid any AMT in the year you exercised. If you did, you might be eligible for an AMT credit. The whole ISO system is ridiculously complicated. When I exercised some ISOs in 2022, I had to pay AMT that year. Then when I sold in 2023 (disqualifying disposition), I got ordinary income but was also eligible for an AMT credit. Make sure you're tracking all this stuff.
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Miguel Alvarez
•I'm honestly not even sure if I paid AMT when I exercised these. How would I know? Would it have been obvious on my 2023 return or is this something that could have happened without me realizing it?
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Oliver Becker
•Check your 2023 tax return for Form 6251 (Alternative Minimum Tax). If you paid AMT, it would show up there and on line 1 of Schedule 2 of your Form 1040. If you did pay AMT in 2023 when you exercised, you'll likely be eligible for an AMT credit on your 2025 return (for the 2024 tax year when you sold). You'll need to file Form 8801 (Credit for Prior Year Minimum Tax) along with your return. This credit can potentially offset some of the tax impact from your disqualifying disposition.
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Natasha Petrova
Something else to consider with ISOs - if your company is private or was private when you exercised, the calculation of the bargain element can get really messy. Companies use 409A valuations which might not match what you think the shares are worth. My company went public 8 months after I exercised some ISOs and the 409A value at exercise ($12/share) was WAY lower than the IPO price ($47/share). I made a disqualifying disposition but the bargain element was calculated based on the lower 409A value, not the public market value when I sold.
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Javier Hernandez
•Yep, this happened at my last job too. But be careful - some companies mess up the reporting on disqualifying dispositions. My employer reported the wrong amount on my W-2 (they used the sale price instead of FMV at exercise for calculating the ordinary income). Had to get an amended W-2 which was a huge hassle. Double-check your W-2 when you get it!
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