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Disqualifying Disposition (Incentive Stock Option)

A sale, gift, or exchange of ISO shares within two years from the grant date or within one year from the exercise date. (Compare this to an ISO qualifying disposition.) Upon a disqualifying disposition, the employee recognizes taxable ordinary income, and the company is entitled to claim a deduction equal to the excess of the fair market value on the exercise date or the sale price, whichever is lower, over the exercise price. For details on the tax treatment at early sale, see the section ISOs: Taxes elsewhere on this website.

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