Introduction

The Disqualifying Dispositions Report is a new feature to track exercised Incentive Stock Options
(ISOs) that have become disqualified through sale or transfer before the IRS required holding period.
This report calculates the ordinary income companies are required to file on the holder's W2. This
report may help simplify the process by automating the identification and calculation of reportable ordinary income. Holders are now able to see which of their shares have become disqualified.

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Disqualifying dispositions information
Running the Disqualifying Dispositions Report
Affected workflows
Viewing disqualified disposition transactions in the My Equity page
FAQs

Disqualifying disposition information

What is a disqualifying disposition?

A disqualifying disposition is a sale or transfer of exercised ISO shares prior to the IRS required
holding period. One of the benefits of ISOs is that they aren’t taxed at the time of grant, vesting, or exercise; instead, they’re taxed when the exercised shares are sold.

The IRS requires a holding period for exercised ISO shares to maintain their preferential tax status. There are two parts to the holding period, and both must be met to maintain ISO status:

Shares must be held for two years after the grant date.
Shares must be held for one year after the exercise date.
*The holding period for early-exercised shares begins at the vesting date.

Exemptions

There are three exemptions that can allow transfer during the holding period without forfeiting the ISO
status:

Death: Transferring shares from a decedent to an estate or a transfer by bequest or inheritance.
Divorce: Transfer of shares to a former spouse as part of a divorce settlement.
Living Trusts: Transferring shares to certain revocable living trusts may be eligible.

What happens to ISO shares that become disqualified?

If a shareholder makes a disqualifying disposition of ISO shares, then those shares lose their
preferential tax status. The spread between the original exercise price and the fair market value (FMV) at the time of exercise will be reported as ordinary income.

A disqualifying disposition has tax implications for both the company and the recipient:

Company: Required to report ordinary income on the holder's W2. The company receives a
tax deduction for the same amount. (Please note there is no withholding tax on ordinary income
from disqualifying disposition.)
Recipient: Upon sale or transfer, the spread is taxed as ordinary income rate, which is typically
higher than capital gains tax rates.

Running the Disqualified Dispositions Report

The Disqualified Dispositions Report can be found the Equity Transactions page. To open the report, you can click on the Equity menu in the left-hand menu and then click on Equity Transactions, or from the company workspace, click on the MORE button in the Equity & Financing module and select Equity Transactions.

Click on Disqualifying Dispositions to view the report.

This report includes:

Stockholder name
Date the option was issued
Reason for disqualification (with a link to view the related document in the Data Room)
Number of shares disqualified
Exercise date
Disqualified date
FMV at exercise
Exercise price
Ordinary income amount (The difference between the FMV at exercise and the exercise price, multiplied by the number of shares)

To show specific transactions, use the search box to select a specific stockholder. The report can be exported into an Excel format by clicking on Export report. Clicking on Settings allows you to adjust the date range for the report.

Affected workflows

To support the Disqualifying Dispositions report, a new question has been added to Add transferee steps within the Stock Transfer & Record Existing Stock Transfer workflows and the Record Existing Secondary Sale workflow. The disqualifying disposition question will only appear if the transaction occurs within the IRS required holding periods.

Stock Transfer and Record Existing Stock Transfer

In the Stock Transfer or Record Existing Stock Transfer workflow, the following question will display if the transaction occurred during the IRS required holding period. Selecting Yes will mark the transaction as exempt and exclude it from the Disqualifying Dispositions Report. Selecting No will include the transaction on the Disqualifying Dispositions report.

Once the transferee has been added, the status of the exemption will display.

Record Existing Secondary Sale

Exemptions for secondary sales are generally very rare. If you are running the Record Existing Secondary Sale and the transaction is exempt please contact support.fps@fidelity.com for further assistance.

Disqualified transactions in the My Equity page

Stockholders can view any disqualifying disposition transactions on the My Equity page. A Disqualifying Transaction indicator appears under the transaction on both the overview and grant detail screens.

In the My Grants section, the Disqualifying Transaction indicator appears in the Transactions column.

Viewing the grant details, the Disqualifying Transaction indicator displays in the Transactions section.

Note that the Disqualifying Disposition indicator only displays on the original stockholder's My Equity page; there is no indicator on the transferee's My Equity page.

FAQs

What is the difference between disqualifying disposition and non-qualified options? While both lack preferential ISO tax treatment, the primary difference is that a disqualifying disposition occurs when the recipient no longer owns the share because of a disqualifying transaction (i.e., it’s been transferred or sold). With a NQO grant, the recipient still owns the shares once exercised.

What happens if there is a partial transfer or partial sale? In a partial transfer or partial sale, only the sold or transferred shares are affected. The remaining shares maintain their ISO status. The Disqualifying Dispositions Report will only reflect the sold or transferred shares.

Do we collect transfer fees or sales costs associated with a transaction for stakeholder’s tax purposes? We don’t collect or report any fees or costs associated with a transfer or sale. These amounts are reported on the stockholder's individual tax return and are the responsibility of the stockholder.

Does this feature support subsequent sales or transfers by the transferee? No, this report only tracks disqualifying disposition transactions initiated by the original stakeholder. Any subsequent transfers or sales by the transferee will not be subject to the disqualifying disposition modals or report.

Screenshots are for illustrative purposes only.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Fidelity Private Shares LLC provides cap table management and other administrative services to private companies and their equity compensation plans.

Fidelity Private Shares LLC

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