ISO AMT is the alternative minimum tax exposure that can hit when you exercise incentive stock options and hold the shares instead of selling immediately.

How it works

When you exercise ISOs, the difference between the strike price and the fair market value at exercise is generally not ordinary income for regular tax — but it does count as an adjustment for the alternative minimum tax (AMT). You file Form 6251 and may owe AMT even though you received no cash.

Example: you exercise 50,000 ISOs at $0.10 when the 409A value is $2.00. The spread is $1.90 per share, or $95,000 of AMT preference. That can produce a meaningful tax bill in April with no stock sale to fund it.

If you sell the shares in the same calendar year as exercise, an AMT credit may offset regular tax in later years — but the timing rules are strict. Holding past year-end keeps the AMT risk alive until you qualify for a qualifying disposition.

Why it matters

• Founders: Early exercise is common for starting long-term capital-gains treatment, but ISO AMT is the hidden cost. Model the spread at current 409A before you sign an 83(b) or exercise.
• Investors: Cap-table and option-pool design affects how much ISO capacity employees have. Heavy early exercise without tax education creates retention and cash-flow problems for key hires.

Common mistake

Assuming ISOs are always “tax-free until sale.” The regular-tax deferral does not automatically mean zero tax — AMT can bite on exercise alone.

Related ideas

• 409A valuation — sets the FMV used in the spread calculation
• Stock options and qualifying dispositions
• Net exercise and same-day sales as ways to manage cash tax risk