The qualifying disposition generally refers to the sale of a stock that grants tax benefits. It also covers transfers and exchanges that generate income for the taxpayer.
However, these only include stocks acquired from ISOs (incentive stock options) and ESPPs (employee stock purchase plans). Essentially, there isn’t really a difference between how they’re taxed. When you hold the stock you bought from an exchange for more than a year and sell it for a profit, it becomes long-term capital gains.
Holding a stock that you bought from ISOs or ESPPs for one year or more and selling it for a profit will mean a qualifying disposition, which is taxed at the capital gains tax rate. All in all, here are the qualifying disposition tax rates that apply to taxpayers in 2022.
Qualifying disposition tax rate (single filers)
0 percent for taxable income up to $41,675.
15 percent for taxable income between $41,676 and $459,750.
20 percent for taxable income over $459,750.
Married filing jointly
0 percent for taxable income up to $83,350.
15 percent for income between $83,351 and $517,200.
20 percent for taxable income over $517,200.
Head of household
0 percent for taxable income up to $55,800.
15 percent for taxable income between $55,800 and $488,500.
20 percent for taxable income over $488,500.
Disqualifying disposition means selling the stock within a year of the purchase. For example, your stock options were granted on July 1, 2020 and you exercised them on March 1, 2021. From March 1, 2022 and onwards, selling the stock will be under qualifying disposition.
When disqualifying disposition occurs, the income generated from the sale is taxed as ordinary income, which is higher than the capital gains tax rate in most cases.