If you participate in an ESPP, you’ll likely hear the terms qualifying disposition and disqualifying disposition. These terms speak to holding period requirements for your ESPP shares that impact how and when your sale proceeds will be taxed.
A qualifying disposition is a final sale of ESPP that meets the following two requirements:
- The final sale of your shares occurs at least two years from the grant/offer date, AND
- The final sale of your shares occurs at least one year from the purchase date.
Generally speaking, if you meet the qualifying standard and profit from the transaction, the discount from the purchase price received (if any) is taxed as ordinary income, and other proceeds are taxed as a long-term capital gain/loss. If you have a disqualified sale, you’ll generally pay ordinary income on profit.
ESPPs are notoriously complicated when it comes to tax, but you can learn more here.