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🇺🇸 US · US tax

Disqualifying disposition

Also called: disqualifying sale

In one line

Selling ISO shares before meeting the required holding periods, which forfeits the favourable tax treatment.

In plain English

ISOs only get capital-gains treatment if you hold the shares long enough after exercise and grant. Sell too soon and part of your gain is taxed as ordinary income instead — a 'disqualifying' sale.

If you were explaining it to a 5-year-old

The toy had a tax discount if you kept it a year. You sold it after a month, so you lose the discount and pay normal tax.

Why it matters when you sell

If a secondary comes along before you've met the ISO holding periods, selling can cost you the tax break — timing a sale around this can be worth real money.

Related terms

Incentive stock option (ISO)Qualifying dispositionLong-term capital gainsOrdinary income (equity)Holding period

Put it to use

Cost to exercise + AMT

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Sources

Primary references for this term: IRS (US tax). Our definitions are written in plain English and kept evergreen — see the glossary methodology. General information, not advice.

Educational information only — not financial, tax or legal advice, and not an offer to buy or sell any security. Definitions are general; your own documents and local law govern your situation. PrivateTechShares is independent and not a broker or marketplace.