A qualifying disposition of incentive stock options occurs if you sell shares at least two years past the ISO grant date, and at least one year past your exercise date. A disqualifying disposition is any sale that does not meet both of these requirements. Proceeds from a qualified sale are taxed at usually more favorable capital gains rates. Proceeds from a disqualified sale are subject to various, usually higher tax rates. However, by taking a qualified disposition, you may assume extra concentration risk. If the stock price drops in the year or so after you exercise your options but before you sell the stock, you may lose more in share value than the tax savings are worth.
