Taxes & Equity Comp: Alternative Minimum Tax Surprises
TL;DR
AMT is a separate tax system that can hit you hard when exercising ISOs—even if you don’t sell a single share.
The tax is based on the spread between your exercise price and market value, a “paper gain” with no cash in hand.
Plan ahead: exercising strategically and using AMT credits can help you avoid (or at least soften) the blow.
The $50K Tax Bill on Stock You Didn’t Sell
You finally decide to exercise your Incentive Stock Options (ISOs). You’ve been waiting for this. You believe in the company, the FMV is up, and you’re playing the long game. All good, right?
Then tax season hits. Your accountant gives you a look. You owe $50,000 in taxes.
"But I didn’t even sell the shares," you say.
Welcome to the strange world of the Alternative Minimum Tax (AMT)—where you can pay real money on gains you haven’t realized.
What Is AMT, and Why Should You Care?
AMT is a parallel tax system designed to ensure high-income earners pay at least a minimum amount of tax, even if they qualify for a bunch of deductions under the regular system. It was meant to target the ultra-wealthy.
In practice? It often hits startup employees and tech professionals who exercise ISOs. Not because they made tons of money. But because they might have—on paper.
Why ISO Exercises Trigger AMT
Incentive Stock Options come with a special tax benefit: if you hold the shares long enough, you may qualify for long-term capital gains instead of ordinary income tax.
But here’s the catch: when you exercise ISOs, the IRS considers the difference between your strike price and the fair market value (FMV) as income for AMT purposes. Even if you don’t sell a single share.
Example:
You exercise 10,000 ISOs at $2/share when the FMV is $20/share.
That’s an $18/share spread.
$180,000 in AMT income.
No cash changes hands. But you could owe thousands in taxes.
Real Cash, Imaginary Gains
This is the part that catches people off guard. AMT isn’t just theoretical. It’s a real tax bill based on unrealized gains. You might owe tens of thousands before you make a single dollar from selling your stock.
Even worse: if the stock price drops after you exercise, you’re still on the hook for the AMT based on the higher FMV at the time of exercise.
Strategies to Manage the AMT Hit
The good news? There are ways to manage AMT risk if you plan ahead.
Early Exercise: If you can exercise when FMV is close to your strike price (often early in your vesting schedule), the AMT hit may be minimal.
Staggered Exercises: Spread your exercises across years to stay under AMT exemption thresholds.
Disqualifying Dispositions: Sometimes it makes sense to intentionally sell within a year and take the ordinary income hit to avoid AMT.
AMT Projections: Work with a tax advisor and run the numbers before exercising. It can save you big.
Know Your AMT Credit: If you do pay AMT, you may be able to recover some of it in future years through the AMT credit. It’s not immediate, but it helps.
The Long Game: Plan, plan, plan
AMT doesn’t mean you made a mistake. It just means the tax code wasn’t built with modern equity comp in mind.
Stay proactive:
Track your vesting schedule and 409A valuations.
Coordinate with your CPA before year-end.
Be aware of state-specific rules—some states (like CA) conform to federal AMT, others don’t.
Discuss with your financial advisor well before any exercise so they can take this into account.
This is one of the clearest cases where good planning makes a huge difference.
If you’re holding ISOs, don’t wait until April to understand your AMT risk. Do a dry run in Q3 or Q4. Even better? Build a long-term strategy that aligns your equity with your cash flow and tax exposure.
Because if your stock hasn’t made you rich yet, don’t let AMT make you poor in the meantime.
