How are stock options taxed?+
It depends on the option type. Non-Qualified Stock Options (NSOs) are taxed at exercise as ordinary income on the spread (FMV minus strike price). Incentive Stock Options (ISOs) have no regular tax at exercise but the spread is added to Alternative Minimum Tax (AMT) income. For both types, when you eventually sell the underlying shares, the gain from exercise price to sale price is capital gain (short-term if held under 1 year, long-term if over). ISOs that meet the 'qualifying disposition' rules (held 2 years from grant AND 1 year from exercise) get long-term capital gain treatment on the entire spread plus subsequent appreciation.
What is the difference between ISO and NSO?+
ISOs (Incentive Stock Options) are tax-advantaged: no regular tax at exercise, potential for long-term capital gain treatment on the full spread if you meet holding-period requirements. They're limited to $100,000 vesting per year. ISO exercises can trigger Alternative Minimum Tax — the spread is AMT income even though it's not regular income. NSOs (Non-Qualified Stock Options) are simpler but less favorable: spread at exercise is ordinary income with W-2 withholding. NSOs have no AMT issue. ISOs are usually issued to employees only; NSOs can go to employees, consultants, board members, advisors.
What is AMT and how does it affect ISOs?+
Alternative Minimum Tax is a parallel tax system requiring high-income taxpayers to compute tax under two systems (regular and AMT) and pay the higher. ISO exercise adds the spread (FMV minus strike at exercise) to AMT income even though it's not regular income. A large ISO exercise can produce a substantial AMT bill in the year of exercise. Strategies: exercise early in the calendar year (so you can sell shares if value drops before year-end and unwind the AMT), exercise in tranches across multiple years to stay below the AMT exemption ($88,100 single / $137,000 married in 2026), and use AMT Credit in subsequent years to recover the prepaid tax.
When should I exercise my stock options?+
Common strategies: (1) Exercise ISOs early when the spread is small to start the 1-year clock for long-term capital gains while keeping AMT exposure low; (2) Exercise NSOs when you have other deductions or low income to absorb the ordinary income; (3) Cashless exercise (sell-to-cover) if you need cash to pay tax — sell some shares to fund the rest; (4) Time exercises around income — exercise in low-income years (sabbatical, between jobs, before a big bonus year); (5) Avoid exercising right before an IPO if there's high stock price risk; the spread is locked in but the underlying value can drop.
Do I need to pay AMT if I exercise ISOs?+
Not necessarily. The AMT calculation compares your regular tax to your AMT-adjusted tax — you only owe AMT if the AMT calculation exceeds regular tax. For 2026, the AMT exemption is $88,100 single / $137,000 married, with phase-outs starting at $626,350 single / $1,252,700 married. Below those thresholds, modest ISO exercises often don't trigger AMT. Above them, even small ISO spreads can push you into AMT territory. Run the AMT Trigger Calculator on this site before exercising to compute the breakeven point — the maximum spread you can recognize without owing AMT in your situation.