Updated July 28, 2026. Quick answer: Selling before two years from grant or one year from exercise is a disqualifying disposition: the spread becomes ordinary income instead of capital gain. It also removes the AMT preference for that year, which is occasionally the point.
The two clocks
Qualifying treatment needs both: at least two years from grant, and at least one year from exercise (IRC §422(a)(1)). Miss either and the disposition is disqualifying.
What changes
| Qualifying | Disqualifying | |
|---|---|---|
| Spread at exercise | Long-term capital gain at sale | Ordinary income |
| AMT preference | Applies in exercise year | Removed if sold in the same year |
| Further appreciation | Long-term gain | Capital gain from exercise-date value |
When you would do it deliberately
Two situations. If the stock has fallen since exercise, selling in the same calendar year unwinds the AMT preference and stops you paying tax on a gain that no longer exists — this is the escape hatch from the classic ISO disaster.
And if you never wanted a concentrated position, a same-day disqualifying disposition turns the whole thing into a straightforward ordinary-income event with no AMT complexity and no phantom income. Higher rate, radically lower risk.
Run your own numbers. ESPP disposition calculator — compare a qualifying and disqualifying sale.
Sources
IRC §422(a)(1); IRC §421(b); IRC §56(b)(3).
This states what the cited authority says. It is not tax advice; AMT in particular is computed across your whole return and cannot be resolved from one page.