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Subject:   Holding Period for ISOs
Date:   Tue, 05 Sep 2006
From:   Jeff

Mike:

I am getting different advice from different CPAs about the holding period for ISOs. As I understand it, to avoid a disqualifying disposition, I must hold the stock beyond the later of the following two dates: (1) One year after the date the ISO is exercised; or (2) Two years after the date the ISO is granted.

Two CPAs told me I must satisfy both requirements and two other CPAs told me only one requirement needs to be satisfied.

I was granted ISOs on August 3, 2001. These shares are now 100% vested. I haven't exercised the ISOs yet. Do I still have to wait more than one year to avoid a disqualifying disposition?

Jeff

Answer

Date:   Mon, 11 Sep 2006

Hello Jeff,

Yes, you also need to hold the shares more than one year after exercise to avoid a disqualifying disposition.

Tell the CPAs who told you otherwise to see Internal Revenue Code Section 422(a)(1). It's pretty clear.

Good luck!

Mike Gray

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.