Incentive Stock Options
On March 1, 2024, Karen's employer granted her incentive stock options (ISOs) with an exercise price of $20 per share. Karen exercised the options on June 1, 2025, when the stock's fair market value was $35 per share. She sold the shares on July 15, 2026, for $50 per share.
How will Karen's gain be treated for regular income tax purposes?
Karen made a qualifying disposition. To receive favorable ISO treatment, the shares must be held at least two years from the grant date (March 1, 2026) and at least one year from the exercise date (June 1, 2026). Her July 15, 2026 sale meets both holding periods.
With a qualifying disposition, there is no regular income tax at grant or exercise, and the entire gain is long-term capital gain when the shares are sold:
Sale price: $50
Exercise price (basis): $20
Long-term capital gain: $50 − $20 = $30 per share
Keep in mind that the $15 per share bargain element at exercise ($35 − $20) is an adjustment for alternative minimum tax (AMT) purposes in 2025, because Karen held the shares past the end of the year she exercised.
