What is a qualifying versus disqualifying disposition of ISO shares?

A qualifying disposition happens when you sell ISO shares more than two years after the grant date and more than one year after exercise. Meet both clocks and your entire gain above the strike price is taxed at favorable long-term capital gains rates – the main reward of ISOs. A disqualifying disposition is selling before either deadline; then the bargain element at exercise becomes ordinary income (added to your W-2 or reported as wages), and any remaining gain is capital. Disqualifying isn't always bad – it sidesteps AMT and can make sense if the stock is risky. But if you've already paid AMT by holding, satisfying the qualifying-disposition clocks lets you recover it through the AMT credit. Track both dates carefully for every exercise lot.