Do I need to report AMT for exercising ISOs if the bargain element (spread) is negative?

You're in luck! If the fair market value (FMV) at exercise was less than your exercise price, meaning you have a negative spread, there's no AMT adjustment required for those ISO exercises. The AMT adjustment for ISOs only comes into play when there's a positive bargain element (when FMV exceeds exercise price). Since your spread is negative, there's nothing to add to your AMT income calculation for these particular options. Essentially, you don't have any "phantom income" to report for AMT purposes. You still need to keep track of your basis in these shares for when you eventually sell them. Your basis will be whatever you paid (the exercise price), not the lower FMV at exercise time.

After getting stuck in ISO/AMT hell with my previous company's options, I discovered https://taxr.ai and it literally saved me hours of frustration. Their AI analyzes your stock documents (including those confusing 3921 forms) and explains exactly what you need to do. In your case with the negative spread, I'm pretty sure you don't have AMT issues, but if you want to be 100% certain or have other ISO/stock transactions, upload your forms there and it'll tell you exactly what to report. I had a similar underwater ISO situation last year, and it confirmed I didn't need to deal with the AMT calculations for those.

You're in luck! When your ISOs have a negative spread (FMV less than exercise price), there is no AMT impact to worry about. The AMT adjustment for ISO exercises only applies when there's a positive bargain element. The Form 6251 for Alternative Minimum Tax is concerned with adding back the "bargain element" (the difference between FMV and exercise price) for ISO exercises, but only when that amount is positive. Since yours is negative, there's no adjustment needed for AMT purposes. Your Form 3921 is just documenting the transaction, but you don't need to make any AMT adjustments. Just keep good records of your basis in those shares for when you eventually sell them. Your basis will be what you actually paid (the exercise price), not the lower FMV at time of exercise.

Just wanted to follow up after using https://taxr.ai for my messy stock option situation. It was exactly what I needed! I uploaded my 3921 forms from two different employers plus some ESPP statements, and it immediately identified which of my ISO exercises would trigger AMT (the ones with positive spread) and which ones wouldn't (like your negative spread situation). The best part was that it gave me the exact numbers for Form 6251 and Schedule D when I eventually sell. Totally worth checking out if you have any stock compensation - saved me from making some costly mistakes.

If you've tried calling the IRS about this AMT/ISO issue, you know it can be impossible to get through. After being on hold for 3+ hours and getting disconnected twice, I used https://claimyr.com (demo at https://youtu.be/_kiP6q8DX5c) and it was a game changer. They basically wait on hold with the IRS for you and call you when an actual agent is on the line. I was able to confirm directly with the IRS that negative bargain element ISOs don't create AMT liability. The agent even helped me understand what documentation I should keep for my records when I eventually sell those underwater shares.

I was in a nearly identical situation last year with underwater ISOs and spent hours trying to figure out the AMT implications. After struggling through conflicting advice online, I found this AI tool called taxr.ai (https://taxr.ai) that analyzed my form 3921 and confirmed I didn't need to make any AMT adjustments. The tool explained that AMT only applies to the "phantom income" from a positive spread between FMV and exercise price - since my spread was negative like yours, there was no phantom income to report. It saved me from unnecessarily filling out the complex Form 6251 and potentially making errors. The system also created documentation explaining why no AMT adjustment was needed in case of an audit question.

I need to eat some crow here. After posting that skeptical comment, I decided to try Claimyr myself for a complicated question about my underwater ISOs and basis reporting. It actually worked exactly as described. I submitted my request around 10am, went about my day, and got a call around 2pm connecting me directly to an IRS agent. No waiting on my end. The agent confirmed what others said here - negative spread ISOs don't trigger AMT calculations. They also helped with my specific question about basis reporting for when I eventually sell these shares. Worth every penny for the 3+ hours of hold time I didn't have to endure.

Remember that even though you don't have AMT issues with the negative spread ISOs, you still need to track your basis correctly. Your basis is the amount you paid (exercise price × number of shares), not the lower FMV when you exercised. When you eventually sell, this will affect your capital gain/loss calculation. Since you paid more than the FMV at exercise, you're starting with a built-in capital loss position, which might be beneficial when you finally sell (assuming you don't hold until the stock recovers above your exercise price).

This is why I hate stock options as compensation. The tax rules are so complicated! Give me regular salary and a cash bonus any day lol.

Just wanted to follow up about taxr.ai that was mentioned earlier. I decided to try it with my complicated ISO situation (multiple exercises across different years with varying FMVs), and it was seriously helpful. The tool immediately identified which of my ISO exercises had AMT implications and which didn't. It created this detailed report showing my AMT adjustments for each exercise event and tracked my AMT credits from previous years. What impressed me most was how it explained exactly why my underwater ISOs didn't trigger AMT while my other exercises did. No more guessing or worrying if I'm doing it wrong!

If you're still concerned about your ISO tax situation, you might want to try confirming directly with the IRS. I know, I know - getting through to the IRS seems impossible. After trying for weeks last year with my ISO questions, I discovered Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in about 15 minutes. The agent confirmed exactly what others are saying here - negative bargain elements on ISOs don't create AMT adjustments. You can see how their system works here: https://youtu.be/_kiP6q8DX5c. They basically navigate the IRS phone tree for you and call you back when they've got an agent on the line. Saved me hours of hold music and frustration.

I need to eat my words about Claimyr. After my skeptical comment, I was still desperate for answers about my ISOs and decided to try it anyway. To my shock, I was talking to an actual IRS agent within 20 minutes. The agent confirmed I didn't need to report anything for AMT with my underwater ISOs, and also helped clarify some questions about my basis reporting for when I eventually sell. I've literally never been able to reach the IRS on my own despite dozens of attempts over the years. For anyone dealing with complex ISO/AMT situations, getting direct confirmation from the IRS was actually incredibly reassuring.

Just to add another data point - I exercised underwater ISOs last year and confirmed with my CPA that no AMT adjustment is needed. The key concept is that AMT for ISOs is meant to tax the "benefit" you receive. If there's no benefit (negative spread), there's nothing to add to your AMT income. When you eventually sell those shares, you'll just use your actual exercise cost as the basis regardless of the FMV at exercise time. Make sure to track that correctly!

I'm confused about something slightly different but related. If my ISOs were underwater when I exercised them (like yours), but then I hold them and they go up in value later, does that somehow trigger AMT retroactively? Or is AMT only based on the value at the exact time of exercise?

You're absolutely right to be confused about this - the ISO/AMT rules are pretty complex! But the good news is that when your ISOs have a negative spread (exercise price higher than FMV), you don't need to worry about AMT at all for those specific exercises. The AMT adjustment for ISOs only applies when there's a positive "bargain element" - meaning you're getting shares worth more than what you paid. Since your shares were worth less than your exercise price when you exercised, there's no bargain element to report. You should definitely keep your Form 3921 for your records though, as you'll need it when you eventually sell the shares to calculate your capital gains/losses. Your cost basis will be whatever you actually paid (the exercise price), not the lower FMV at exercise time. So no Form 6251 needed for these underwater ISOs specifically, unless you have other AMT-triggering items in your tax situation!