Module
ISOs
6 min read
What ISOs are
Incentive Stock Options. The right to buy shares at a fixed strike price, with US tax treatment that's friendlier than regular options if you play it right. ISOs are only available to employees of the issuing company.
The tax shape
At exercise: no regular income tax. (Yes, really.) At sale: if you held shares for more than 1 year past exercise AND more than 2 years past grant, the entire gain from strike to sale is taxed at long-term capital-gains rates. That's the qualifying disposition. Miss either holding period and you have a disqualifying disposition: the spread at exercise gets taxed as ordinary income retroactively.
The AMT trap
At exercise, your ISO spread (FMV minus strike, multiplied by shares) is added to your Alternative Minimum Tax income. If the AMT calculation comes out higher than your regular tax, you owe the difference. People have been bankrupted by AMT bills on shares they couldn't sell. This is the single biggest ISO landmine. Talk to a tax advisor before exercising any meaningful number of ISOs.
Leaving
When you leave a company, your unvested options stop vesting. Your vested options usually have an exercise window after termination. The historical default is 90 days, but more companies are offering longer windows now. Check your plan document or your company's equity team. Miss the window and you forfeit the options.
Educational only. Not tax, legal, or financial advice. Talk to a qualified advisor.