Should you exercise your options?

Incentive stock options (ISOs) give startup employees the right to buy company shares at a fixed strike price, regardless of what the shares are worth later. If the company grows, the gap between your strike price and the current fair market value (FMV) can become significant. That gap is called the "spread," and it is what triggers tax consequences when you exercise.

The timing of your exercise matters because ISOs are subject to the Alternative Minimum Tax (AMT). Unlike regular income tax, AMT treats the spread on exercised ISOs as taxable income even though you haven't sold anything and haven't received any cash. This catches many employees off guard: they exercise options expecting no immediate tax hit, only to discover they owe tens of thousands in AMT when they file their return. The AMT risk for ISO holders has shifted with recent legislation, making it even more important to run the numbers before you act.

This calculator models the AMT calculation for your specific situation. Enter your option grant details, income, and filing status, and it estimates your additional tax exposure at different exercise amounts. The slider lets you find the sweet spot where you can exercise options without crossing the AMT threshold, so you can make an informed decision about how many shares to buy and when.

Exercise and hold. This is the classic ISO play. You exercise your options, pay the strike price to buy the shares, and hold them. If you hold for at least one year after exercise and two years after the grant date, any gain when you eventually sell is taxed at long-term capital gains rates (currently 15-20%) instead of ordinary income rates (up to 37%). The tradeoff is AMT: the spread on exercise counts as AMT income in the year you exercise, even though you haven't sold anything. You need cash to cover both the exercise cost and the potential AMT bill.

Exercise and sell same day. This eliminates AMT entirely because there's no holding period. You exercise and immediately sell (in an IPO, tender offer, or secondary sale). The gain is taxed as ordinary income, which means a higher tax rate, but you get cash and avoid the risk of paying AMT on shares that might later decline. This is often called a "disqualifying disposition" because it disqualifies the ISO's favorable tax treatment.

Partial exercise to stay under the AMT threshold. Instead of exercising all your vested options at once, you exercise just enough each year to stay below the AMT exemption. This calculator's slider helps you find that number. By spreading exercises across multiple tax years, you can build your position without triggering any additional tax. It requires patience and the assumption that you'll remain at the company (or that the exercise window is long enough).

Early exercise with 83(b) election. If your company allows early exercise of unvested options, you can file an 83(b) election within 30 days to be taxed on the spread at exercise, which is often zero or near zero for early-stage companies. This starts your capital gains holding period and QSBS clock immediately. The risk is that if you leave before the shares vest, you forfeit them and lose the cash you paid. This strategy works best when the FMV is still close to the strike price.