- 9 - of the stock is characterized as capital gain if the holding requirements under section 422(a)(1) are satisfied. Secs. 1221 and 1222; sec. 14a.422A-1, Q&A-1, Temporary Income Tax Regs., supra. In order to qualify for capital gain treatment, the taxpayer must hold the stock he acquires by exercising an ISO for a period ending no earlier than 2 years after the grant date or 1 year after the transfer of the stock to him. Sec. 422(a)(1). Selling a share of stock before the holding period expires results in a disqualifying disposition. Sec. 421(b). If a disposition is disqualified, recognized gain on the sale of the stock is characterized as ordinary income up to the fair market value (FMV) of the stock at the date the option is exercised, and the balance, if any, is treated as capital gain.8 Sec. 421(b); sec. 14a.422A-1, Q&A-2(a), Temporary Income Tax Regs., supra.9 8 The gain treated as ordinary income in a disqualifying disposition is the lesser of: (1) The fair market value of the stock on the date of exercise minus the option price; or (2) the amount realized on disposition minus the option price. Sec. 14a.422A-1, Q&A-2(a), Temporary Income Tax Regs., 46 Fed. Reg. 61840 (Dec. 21, 1981). 9 New regulations under sec. 422 became effective Aug. 3, 2004, but are not applicable to the years at issue. Sec. 1.422- 5(f), Income Tax Regs.Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
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