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share is made by the individual within 2 years from the date of
the granting of the option nor within 1 year after the transfer
of the share to the individual, and (2) the taxpayer remains an
employee of the corporation granting the option (or of a parent
or subsidiary corporation of such corporation) during the period
beginning on the date the option was granted and ending on the
day 3 months before the date the option was exercised. Any gain
or loss on a sale of shares acquired pursuant to the exercise of
an ISO that are held for the periods prescribed in section
422(a)(1) generally will qualify as a capital gain or loss.
Secs. 1001, 1221, 1222.
Section 421(b) provides that if a taxpayer disposes of any
shares of stock acquired pursuant to the exercise of an ISO
before the expiration of the holding periods prescribed in
section 422(a)(1), the taxpayer shall recognize an increase in
income in the taxable year in which such disqualifying
disposition occurs.8 Section 422(c)(2) provides in pertinent
part that if a taxpayer disposes of any shares of stock acquired
pursuant to the exercise of an ISO before the expiration of the
holding periods required in section 422(a)(1), and such
disposition is a sale or exchange with respect to which a loss
8 Sec. 424(c) provides that the term “disposition” as
related to shares of stock acquired pursuant to the exercise of
an ISO generally means “a sale, exchange, gift, or a transfer of
legal title”.
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