How does exercising ISOs trigger the alternative minimum tax?
When you exercise incentive stock options and hold the shares past year-end, the bargain element (FMV minus strike price) is invisible for regular tax but counts as income for the alternative minimum tax. So a large ISO exercise can push you into AMT and create a tax bill on paper gains you haven't sold. For example, exercising 10,000 options with a $40 spread adds $400,000 of AMT income, potentially generating six figures of tax even though no shares were sold. The danger: if the stock then crashes, you owe AMT on value that evaporated. Many people exercise just enough each year to stay under the AMT crossover, or exercise and sell in the same year (a disqualifying disposition) to avoid AMT entirely. Run the numbers before exercising and holding.
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