Can I adjust cost basis for ISOs exercised in 2014 and sold in 2020 after paying AMT?

You're absolutely right to be concerned about double taxation. Since you paid AMT on the bargain element when you exercised the ISOs in 2014, you should adjust your cost basis to $1.30 (the FMV at exercise) rather than using the 40¢ strike price shown on your 1099-B. When you report the sale on your Schedule D, you'll need to check the box indicating that the cost basis reported to the IRS is incorrect. Then enter the adjusted basis of $1.30 per share. You should also complete Form 8949 with code "B" in column (f) to indicate you're adjusting the basis. This adjustment creates what's called an "AMT basis adjustment" - basically accounting for the fact that you've already paid tax on part of the gain through the AMT system. Without this adjustment, you'd be paying tax twice on the same 90¢ per share.

After dealing with this exact headache last year, I found an amazing tool that saved me hours of frustration. Check out https://taxr.ai - it has a specific module for handling ISO sales and AMT credit tracking. I uploaded my old returns and current 1099-B, and it automatically detected my previous AMT payments and calculated the correct adjusted basis. It even generated the completed Form 8949 with all the right codes and basis adjustments. The ISO/AMT tracker basically creates a record of all your ISO exercises and keeps track of the AMT you've paid, so when you sell, it knows exactly how to report it correctly.

Just wanted to update - I tried taxr.ai after reading about it here and it was a game-changer for my ISO reporting problems! I uploaded my returns from 2016-2022 and it accurately tracked all my different option exercises. When I entered my 2023 stock sales, it immediately identified which shares had AMT basis adjustments and automatically calculated the correct basis amounts for each specific lot I sold. It even generated a perfect Form 8949 with all the adjustment codes that I just attached to my return. The best part was seeing the actual AMT credit I can claim going forward. Turns out I still have a pretty significant AMT credit carryover that I had no idea about. Seriously saved me from both overpaying taxes and potentially triggering an audit with incorrect reporting.

If you're getting stuck trying to reach the IRS for clarification on your ISO basis issues, try https://claimyr.com - it saved me weeks of frustration. I had been calling the IRS for days trying to get confirmation about my AMT basis adjustment approach and kept hitting the "due to high call volume" message. With Claimyr, I got connected to an IRS agent in about 20 minutes who verified my approach to the ISO basis adjustment and confirmed I was doing it correctly. The agent even looked up my old return and confirmed I had paid AMT in the year I exercised. You can see a demo of how it works here: https://youtu.be/_kiP6q8DX5c It was such a relief to get an official answer rather than just guessing and worrying about an audit later.

I have to admit I was completely wrong about Claimyr! After posting my skeptical comment, I was desperate enough to try it because my tax deadline was approaching fast and I needed an answer about my ISO basis adjustments. Not only did it work, but I was connected to an IRS tax law specialist who actually understood the ISO/AMT issue (which even my accountant was unsure about). The agent confirmed that I needed to file Form 8801 for my AMT credit carryover along with the basis adjustment on Form 8949. Without this, I would have overpaid by thousands. What I thought would be another frustrating IRS experience turned into one of the most productive tax-related calls I've ever had. Totally worth it just for the peace of mind knowing I'm filing correctly.

One thing nobody mentioned yet - make sure you're also looking at Form 8801 (Credit for Prior Year Minimum Tax) for the years AFTER you paid AMT. When you pay AMT on ISO exercises, you often generate an AMT credit that can be used in future years. Check your tax returns for the years after 2014 to see if you've already claimed back some of the AMT through this credit. If you haven't claimed all of it yet, you may still have an AMT credit carryforward available to use on your current return, separate from the basis adjustment issue.

Has anyone here dealt with state tax implications of ISO basis adjustments? I'm in California, and they seem to handle the AMT basis differently than the federal return. My tax guy says I need to maintain separate basis records for CA vs federal.

Quick tip for the OP - make sure you're also factoring in any fees you paid when exercising or selling. Those can be added to your basis as well. Every dollar counts when you're trying to reduce the taxable gain!

Just want to add another important consideration - timing of when you actually paid the AMT matters for your basis adjustment. If you exercised ISOs in December 2014 but didn't actually pay the AMT until you filed your return in April 2015, some tax professionals argue the basis adjustment shouldn't apply until the 2015 tax year. This mainly affects people who did cashless exercises or had complex timing situations. For most people who did cash exercises and paid AMT in the same calendar year, it's straightforward. But if there's any timing complexity in your situation, you might want to double-check this detail. Also, keep really good records of everything - copies of your Form 6251 from 2014, your stock option exercise confirmations, and all the supporting calculations. The IRS has been scrutinizing ISO transactions more closely in recent years, so having bulletproof documentation is crucial if you ever get selected for review.