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Lesson 5. Incentive Stock Options > Alternative Minimum Tax Consequences - Pg. 25

Incentive Stock Options 25 Your employer grants 100 ISOs on January 1, 2000, with an exercise price of $20 per share. On June 1, 2001, you exercise those options at a fair market price of $40 per share. On De- cember 1, 2001, you sell the shares for $50 per share. Is this a qualified disposition? The answer is no because the shares were not held for two years from the grant date and were sold sooner than one year after exercise. Either one of these violations disqualifies the disposition and you owe ordinary income tax on both gains. Plain English Disposition refers to the sale of stock acquired through an ISO, although the tax code acknowledges transfers, gifts, or exchanges. Example 1. Example 1 Grant Date Jan. 1, 2000 Exercise Date June 1, 2001 Disposition Date Dec. 1, 2001 Qualified? No Example 2. Example 2 Grant Date Jan. 1, 2000 Exercise Date June 1, 2001 Disposition Date June 2, 2002 Qualified? Yes The second example meets the holding period test. The stock was held longer than one year after exercise and two years after the grant date. In Example 1, you could be liable for ordinary income tax on the difference between the grant price and the fair market value of the stock at disposition: