What Are Stock Options? And Do You Want Them?

In the earlier example, had Rachel sold the 100 shares of X stock on Nov. 10, 2004, the sale would constitute a disqualifying disposition (because the sale occurred within two years following the grant of the ISO). Accordingly, Rachel must recognize ordinary income equal to $1,000, which is the excess of the $2,000 fair market value of X stock upon exercise over the $1,000 strike price. Only the difference between the $2,500 sale price and the $2,000 fair market value upon exercise will be treated as capital gain.