How are disqualifying dispositions of incentive stock options treated?

October 10, 2011

Date:   11 Aug 2008
From:   Krishan

My wife is exercising her incentive stock options in a cashless transaction. She is exercising options for 1,000 shares. 500 of the shares will be sold to pay the option price. The company has told her that the transaction is a disqualifying disposition that will be reported on her Form W-2.

Is the disqualifying disposition of 500 shares or all of the shares? Will income be reported for 500 shares on her W-2, or all of the shares?


Date:   6 Sep 2008

Hello Krishan,

There is only a disqualifying disposition of the 500 shares that are sold to pay for exercising the option. Only ordinary income relating to the disqualifying disposition of the 500 shares should be reported on your wife’s Form W-2.

Consider getting help with preparing your 2008 income tax returns.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options – Executive Tax and Financial Planning Strategies.

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