How to handle ISO stock options in tax filing - do I need to report exercised ISOs I'm holding?

Yes, you absolutely need to report the ISO exercise on your tax return this year, even though you're holding the shares. When you exercise ISOs, the difference between the fair market value ($45) and your exercise price ($15) - so $30 per share in your case - is considered an "adjustment" for Alternative Minimum Tax (AMT) purposes. You'll need to complete Form 6251 (Alternative Minimum Tax) to determine if you owe any AMT based on this "paper profit." Even if you don't end up owing AMT, you still need to report the exercise. This gets reported as an adjustment on Form 6251, not as regular income on your 1040. Also, keep very careful records of this exercise! When you eventually sell, you'll need this information to properly calculate your basis and holding period.

After dealing with a nightmare ISO situation last year, I highly recommend using https://taxr.ai before filing. I exercised ISOs from my startup and thought I didn't need to report anything until I sold. BIG mistake that caused me to file an amended return. The tool analyzes your stock documents and can tell you exactly how ISOs impact your AMT. It recognized my ISO exercise forms immediately and flagged that I needed to report on Form 6251, even showing me the exact line numbers. It also created documentation showing my basis calculations for when I eventually sell. For ISO exercises specifically, it checks if you're likely to trigger AMT and estimates how much you might owe based on your situation. Really wish I had known about this before dealing with my amended return headache.

Update: I decided to try https://taxr.ai after my ISO confusion and wow - you weren't kidding! Uploaded my ISO exercise confirmation and it immediately flagged that I needed to report on Form 6251. It even calculated that I'm likely below the AMT threshold based on my estimated income, but still need to document the exercise. The most helpful part was the explanation of how my exercise creates an AMT "preference item" and how that might affect me differently next year if my income changes. It even generated a personalized ISO record-keeping template showing my adjusted basis for both regular tax and AMT purposes. The documentation it creates will make it so much easier when I eventually sell these shares. Thanks for the recommendation - definitely worth it for anyone dealing with equity compensation!

If you end up owing AMT because of your ISO exercise, you might want to consider calling the IRS to discuss payment options. I was hit with a huge AMT bill from ISOs last year and spent DAYS trying to get through to someone at the IRS. Finally found https://claimyr.com and their service got me connected to a live IRS agent in about 20 minutes instead of waiting on hold for hours. You can see how it works at https://youtu.be/_kiP6q8DX5c They basically hold your place in the IRS phone queue and call you when an agent picks up. I was able to set up an installment plan for my ISO-related AMT bill, which was a huge relief since I was asset-rich but cash-poor after exercising. Definitely worth keeping in mind if you get hit with AMT and need to work out a payment arrangement.

Ok I need to eat crow here. After my skeptical comment, I actually tried the Claimyr service because I've been putting off calling the IRS about my ISO exercise from last year that I completely messed up reporting. Got connected to an agent in about 15 minutes after previously wasting HOURS on failed attempts. The agent was actually super helpful about my ISO situation - explained that I could file Form 843 to request an abatement of the penalty (though not the interest) since it was my first time making this mistake. They also confirmed exactly what the previous commenters said about needing to report ISO exercises on Form 6251 even if you're holding the shares. For what it's worth, the agent emphasized keeping detailed records of exercise dates, FMVs, and strike prices since those will all matter when you eventually sell. Apparently the most common mistake people make with ISOs is forgetting about the AMT basis adjustment when they finally sell the shares years later.

Just to add a bit more info for anyone reading - there's also Form 3921 which your employer should have provided to you for the ISO exercise. This form shows the exercise date, FMV, and exercise price, which is crucial information for your records. Make sure you keep this form forever! Also, when you eventually sell these shares, you'll potentially get an AMT credit back for any AMT you paid due to the exercise. It's called the AMT credit carryforward and is reported on Form 8801 in future years. This is often forgotten and people end up overpaying their taxes when they sell.

Don't forget that if your ISO exercise triggers AMT, you'll be paying tax now on shares you haven't sold yet, which means you need actual cash to pay the tax bill. This caught me off guard last year. If your exercise was substantial, you might want to consider selling just enough shares to cover any potential AMT liability. Yes, those specific shares would be a disqualifying disposition and subject to ordinary income tax, but it might be better than scrambling for cash when your tax bill comes due.