business · 2026-05-01
Project the cost + tax to exercise NSO or ISO stock options at IPO or before — strike price + bargain element + ordinary or AMT tax.
| Strike price per share | $3 |
| Current FMV per share | $18 |
| Shares to exercise | 50,000 |
| Option type | ISO (Incentive Stock Option) |
| Federal ordinary rate % | 32% |
| Federal LTCG rate % | 20% |
| AMT rate % | 28% |
| Exercise cost (strike × shares) | $125,000 |
| Immediate tax owed | $217,000 |
| Bargain element | $775,000 |
The exercise cost (strike × shares) is the obvious number. The tax cost — especially for ISOs triggering AMT — is often as large or larger and surprises early-stage employees who don't have liquidity.
Default scenario: 50,000 shares × $2.50 strike, current FMV $18:
For most early employees, this is a deal-breaker without one of:
Tells the IRS to tax restricted stock at GRANT date FMV (often $0 or near-zero for founders) instead of vesting date FMV (often much higher). Must be filed within 30 days of grant — no exceptions, no extensions. Game-changer for founders/early employees; meaningless once the company has appreciated.
AMT paid creates a Min Tax Credit (Form 8801) usable in future years against regular tax to the extent regular tax exceeds tentative AMT. Most ISO-exercise AMT recovers fully within 5-15 years if you sell over time at LTCG. Track carefully — this is a real refundable asset.
Defeats the purpose of ISO. A same-day sale (exercise + sell within the same year, or before holding 1 year post-exercise) is a 'disqualifying disposition' — bargain element taxed at ORDINARY rates instead of LTCG. Use NSOs for same-day-sale liquidity events; preserve ISOs for long-hold LTCG strategy.