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Financial Planning / Foolish 401(k)s


Subject:  Re: ESPP Date:  11/25/2010  6:05 PM
Author:  BruceCM Number:  24619 of 26154

A 'qualified disposition' with either ESPP or ISO stock options means that you have held the shares at least one year after exercising the option AND you have held the shares at least 2 years following the granting of the options. With ESPPs that have a bargain element (the difference between the option price and the fair market value of the shares on the day of exercise), a qualifying disposition means the bargain element will be treated as a long term capital gain. With a disqualifying disposition, the bargain element will be ordinary income. In either case, the value of the shares above or below the fair market value on the date of exercise will be long or short term capital gain (loss) depending on the holding period of the stock.

Note: with ESPP shares, this does not include the discount, if any, the employer gave the optioned shares, which will forever be ordinary income when the shares are sold.

For a good description of the tax issues surrounding ESPPs, see Kaye Thomas explanation at Fairmark:

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