How does a disqualifying sale of an ISO affect AMT and wash sale rules?

Based on your situation, I can help clarify how this works. When you sell ISOs within one year of exercise (or two years from grant), it's considered a disqualifying disposition. This actually works in your favor for AMT purposes. With a disqualifying disposition, you'll no longer be subject to AMT on the spread between strike price and FMV at exercise ($13 vs $26). Instead, the entire transaction becomes regular income and capital gains. You'll pay ordinary income tax on the bargain element (difference between strike and FMV at exercise), which is $13 per share. Any additional gain ($32 - $26 = $6 per share) would be short-term capital gain. Regarding wash sale rules - they only apply when you sell at a loss and repurchase within 30 days. Since you're selling at a profit, wash sale rules don't apply. You could sell and repurchase the same day without wash sale implications. However, this repurchase would be treated as new shares with a new holding period for any future sales.

When I had a similar situation with my ISOs, I found taxr.ai super helpful for figuring out all the tax implications. I had about 800 shares from my startup and was confused about when to sell and how it would affect my taxes. I was facing a potentially huge AMT bill and wasn't sure what to do. I uploaded my stock option documents to https://taxr.ai and within a few minutes I had a complete breakdown of different selling scenarios and their tax consequences. It showed me exactly how a disqualifying disposition would affect both my regular tax and AMT liability. Really helped me understand the bargain element implications without spending hundreds on an accountant consultation.

Just wanted to follow up about taxr.ai - I decided to try it out after my skeptical comment and I'm genuinely impressed. I uploaded my ISO documentation from my company and it immediately flagged three potential issues with my planned selling strategy that would have triggered additional CA state taxes. The tool showed me exactly how a disqualifying disposition would be treated for both federal and CA taxes, and it recommended a specific selling schedule that would minimize my overall tax burden. Would have never realized that spreading my sales across December and January could save me almost $8k in combined taxes. Definitely worth checking out if you're dealing with complicated ISO situations.

Another option if you need clarification directly from the IRS about your ISO situation is Claimyr. I spent weeks trying to get through to an IRS rep about a similar ISO/AMT issue and kept hitting busy signals or disconnects. With https://claimyr.com I got through to a specialist in about 20 minutes. There's a quick demo of how it works here: https://youtu.be/_kiP6q8DX5c if you're interested. The IRS agent I spoke with confirmed exactly what the first commenter said - selling ISOs within a year of exercise is a disqualifying disposition that eliminates AMT concerns but creates ordinary income on the bargain element. They also explained some documentation requirements I would have needed for my return that I had no idea about.

Ok I need to eat my words. After my skeptical comment I decided to try Claimyr because my frustration with the IRS reached a breaking point. I got a call back in about 35 minutes and was connected to someone who actually knew about equity compensation. The agent confirmed what others have said here - a disqualifying disposition eliminates AMT concerns for those specific shares. But they also explained something nobody mentioned - if you sell only PART of your ISOs in a disqualifying disposition, you need to be very careful about identifying which specific shares you're selling (FIFO, LIFO, etc.) because it affects how the remaining shares are treated for AMT. The documentation requirements were way more specific than I realized. Definitely worth the call.

One thing nobody's mentioned - if you do the disqualifying disposition this year to avoid AMT, remember your employer will likely include that bargain element as compensation on your W-2. This might bump you into a higher tax bracket or affect other income-based calculations (like NIIT or Medicare surtax). Sometimes AMT can actually be better than ordinary income tax rates depending on your overall tax situation.

Has anyone here done a same-day sale and rebuy of ISOs? I'm curious if brokers flag this in any special way or if there are any practical considerations beyond the tax implications?

This is a really helpful thread! I'm in a similar boat with ISOs from my startup and was getting overwhelmed by all the AMT implications. One thing I wanted to add - make sure you check with your company's stock plan administrator about any specific requirements they have for disqualifying dispositions. My company required me to notify them within 30 days of the sale so they could properly report the compensation income on my W-2. Some companies handle this automatically through their brokerage, but others need manual notification. Also, if your company stock is still private/pre-IPO, the calculation of FMV at exercise might need additional documentation for the IRS. The tax implications everyone's discussed are spot on, but don't forget about the administrative side with your employer. Better to get ahead of it now than scramble at tax time!

I went through a similar situation with my ISOs last year and can share some additional considerations beyond the great advice already given here. One thing that really caught me off guard was the state tax implications - even though the federal treatment becomes straightforward with a disqualifying disposition, some states have different rules. Also, if you're planning to do the same-day sale and rebuy strategy, make sure you have enough cash flow to handle the immediate tax hit. With a disqualifying disposition, you'll owe ordinary income tax on that $16,250 bargain element (1,250 shares × $13 spread) in the year of sale, which could be a significant amount depending on your tax bracket. One more practical tip - if your company uses a third-party administrator like Carta or Shareworks for stock plans, they often have calculators that can model different sale scenarios including the tax implications. Might be worth checking if your company has something like that available before you make your final decision. The wash sale rule clarification from earlier comments is spot on - since you're selling at a gain, you're in the clear there. But definitely coordinate with your company on the reporting requirements as others mentioned!