ISO Holding Periods and Disqualifying Dispositions

To get long-term capital gain on the whole gain, don't sell ISO shares until 2 years after the grant date and 1 year after exercise (IRC §422(a)). Selling earlier is a disqualifying disposition: the spread becomes ordinary income and, if it happens in the same year as the exercise, it drops out of AMT income. Only $100,000 of ISOs (by grant-date value) can first become exercisable in a year; any excess is treated as NSOs (IRS Pub. 525).

Last reviewed 2026-10-29. General information, not tax advice. Confirm with Form 6251 or a CPA before you exercise.