Join the NASDAQ Community today and get free, instant access to portfolios, stock ratings, real-time alerts, and more! An Option that has met certain tax requirements entitling the optionee to favorable tax treatment. Such an option is free from regular tax at the date of grant and the date of exercise when a non-qualified option would become taxable.

If two holding period tests are met two years between grant date and sale date and one year between the exercise date and sale datethe profit on the option qualifies as a long term capital gain rather than ordinary income. If the holding periods are not met, there has been a "disqualifying disposition". Legal methods taxpayers can use to reduce tax liabilities. An example is the use of depreciation of assets.

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