Exercising ISOs: the cash cost and the AMT adjustment
Exercising incentive stock options does not create regular taxable income, but the spread between the exercise price and the market value can raise alternative minimum tax (AMT) income if you hold the shares past year-end. See the numbers before you exercise.
Understand the cost of exercising.
Explore a confirmed incentive stock option lot, the holding periods, and the regular-tax and AMT basis records.
The example, step by step.
The situation
- 5,000 ISOs granted on January 15, 2024
- Exercised on February 1, 2026 at a $5 exercise price, when the shares are worth $30
What the calculator finds
- Cash needed to exercise: $25,000, before any tax.
- Exercise spread: $125,000. It is an AMT income adjustment if the shares are held through December 31, 2026, not the tax you owe.
- Basis: $25,000 for regular tax and $150,000 for AMT.
- A sale on or after February 2, 2027 meets both holding periods (more than one year after exercise and two years after grant) and is a qualifying disposition.
The exercise spread can increase AMT income even when you have not sold any shares. An income adjustment is not the amount of tax you owe.
What goes in.
What comes out.
Enter the grant date, exercise date, shares, exercise price and fair market value at exercise. The calculator shows the exercise cost, the spread and both basis amounts.
Add an optional sale to see whether it is a qualifying or disqualifying disposition and how the gain divides between ordinary income and capital gain.
Without a sale, it assumes the whole lot is held through December 31 of the exercise year, when the AMT adjustment applies.
What it does not cover.
- It does not calculate AMT itself, which depends on your whole return, including exemptions and other items.
- State AMT rules such as California’s, AMT credit carryforwards and early-exercise (83(b)) cases are outside its coverage.
- Confirm ISO status, including the $100,000 first-exercisable limit, with your plan documents.
Questions
Do I pay tax when I exercise ISOs?
Not regular income tax if you keep the shares. But the spread at exercise counts toward alternative minimum tax income when the shares are held past year-end, which can create an AMT bill depending on the rest of your return.
What is a qualifying disposition?
A sale more than two years after the grant date and more than one year after exercise. Then the whole gain over your exercise price is generally a long-term capital gain. Sell earlier and part of the gain becomes ordinary income.
What is the difference between regular and AMT basis?
Your regular-tax basis is what you paid to exercise. Your AMT basis also includes the spread that was counted for AMT, so a later sale can produce different gains for regular tax and for AMT.
See the decision inside a full plan.
Explore retirement cash flow, compare scenarios and review the assumptions in a free Amicus sample plan.