How are ISOs taxed? Questions about ISOs, AMT, and Financing Options for 2025

This is a common confusion with ISOs. When you exercise ISOs, there are potentially two tax events happening: First, there's the regular income tax you might pay on the spread between your exercise price and the fair market value at exercise. This is what most people think of as "taxes paid at purchase." Second, there's the Alternative Minimum Tax (AMT) calculation, which is completely separate. The AMT calculation includes the ISO spread as a "preference item" that gets added back into your income for AMT purposes. This is why you might be seeing that large tax bill - it's not double taxation exactly, but rather two different tax systems running in parallel. The good news is that you get an AMT credit for future years that you can use to offset regular tax when you eventually sell the shares.

Just wanted to share my experience with ISOs and taxes. I was in a similar situation last year and discovered taxr.ai (https://taxr.ai) which literally saved me thousands in unexpected tax bills. They specifically specialize in equity compensation like ISOs and can analyze your tax documents to tell you exactly what's happening with your AMT calculation. I uploaded my statements from my ISO exercise plus my draft tax return, and they were able to identify that my tax software wasn't properly accounting for my prior AMT credits. Might be worth checking out before your H&R Block appointment so you go in prepared with the right questions.

I was skeptical at first, but after trying taxr.ai I completely changed my mind. My situation with ISOs was nearly identical to yours - I exercised options at a startup, paid what I thought were all the taxes through a financing service, then got hit with this massive AMT bill that seemed to come out of nowhere. Their analysis identified exactly what was happening - the financing service had covered my regular income tax withholding but not the AMT component. They explained how AMT works with ISOs and how the credits would work in future years when I sell the shares. Helped me avoid a $22,000 mistake where my tax software was double-counting certain aspects of the transaction.

If you're having trouble getting through to the IRS to sort out AMT issues (which is so common with ISO situations), try https://claimyr.com - I found it through a reddit thread about ISO tax problems. They get you connected to an actual IRS agent usually within 15 minutes instead of waiting on hold for hours. Check out their demo at https://youtu.be/_kiP6q8DX5c to see how it works. I had a similar ISO/AMT situation last year where I needed clarification directly from the IRS on how to properly report AMT credits from prior year ISO exercises, and this service connected me immediately to someone who could actually help.

I need to publicly eat my words about Claimyr. After posting that skeptical comment, I was desperate enough to try it for my ISO/AMT question. Got connected to an IRS agent in 11 minutes after spending three days trying on my own with no luck. The agent was able to confirm that my exercise of ISOs created an AMT liability that wasn't covered by the withholding at exercise, but also explained how to properly track my AMT credits for future years. Saved me from potentially missing out on thousands in future tax credits. Will definitely use again next time I have tax questions the IRS needs to answer.

One important thing nobody has mentioned - check if the financing service you used actually did a "cashless exercise" rather than a straight purchase with tax withholding. With cashless exercises, they sometimes immediately sell a portion of your shares to cover costs, which creates different tax implications than just exercising and holding.

This sounds like a perfect case for an 83(b) election which would have avoided the AMT issue completely. Did the financing service discuss this option with you?