How would Alternative Minimum Tax (AMT) work if I exercise ISO below strike price?

Does this mean there's literally no tax impact at all if I exercise underwater ISOs? Not for regular tax or AMT? And if the stock eventually goes back up over my exercise price and I sell later, I'd just pay regular capital gains on the difference between selling price and what I paid, right?

There's no immediate tax impact when exercising underwater ISOs - correct. Neither for regular income tax nor for AMT. You're simply purchasing company stock at above-market prices, which doesn't create a taxable event. If the stock eventually increases in value and you sell, you'll pay capital gains tax on the difference between your selling price and your basis (the strike price you paid). The holding period for determining whether it's long-term or short-term capital gains starts on the exercise date. To get the most favorable tax treatment, you'd want to hold for at least 1 year after exercise and 2 years from the grant date to qualify for long-term capital gains rates.

Did you have to upload all your stock option documents to use it? I'm a bit hesitant to share my financial info with yet another online service. How secure is it?

Did they provide guidance on whether it makes sense to exercise underwater options at all? I'm trying to understand if there's any advantage to exercising when they're underwater vs waiting until (hopefully) the stock price recovers.

You do need to upload your option grant documents for the most accurate analysis, but they use bank-level encryption and don't store your documents after processing. I was skeptical too but their privacy policy is pretty solid and they don't sell your data or anything shady. They absolutely provided guidance on whether exercising underwater made sense in my situation. In my case, they showed that exercising some of my underwater ISOs was beneficial for starting the holding period clock for long-term capital gains treatment, even though there was no immediate tax benefit. They created different scenarios based on my company's potential growth trajectory and showed the tax implications of each approach.

How does that even work? The IRS never answers their phones. I tried calling like 8 times last year about a different issue and always got the "we're experiencing high call volume" message.

Sounds like a scam to me. Why would the IRS talk to some third-party service but not directly to taxpayers? And even if you got through, would regular IRS phone reps really understand the complexities of AMT and ISO interactions? I doubt it.

They don't answer calls on your behalf - they use technology to navigate the IRS phone system and wait on hold for you. When they reach a human agent, they connect you directly to that person. The IRS doesn't even know you used a service - you're the one who speaks with them directly. You're right that not every IRS rep fully understands complex topics like AMT and ISOs. What I did was specifically request to speak with someone in the specialized tax department when connected. I had to be transferred once, but eventually got to someone who clearly understood the stock option tax implications. The key is getting through in the first place, which is what Claimyr helped with.

I exercised about 10,000 underwater ISOs last year. My employer didn't include anything on my W-2 since there was no income to report. They did provide a standard ISO information statement (Form 3921) which showed the exercise price and the FMV at exercise (which was lower). My accountant recommended still completing Form 6251 to document the ISO exercise, even though there was no AMT adjustment. She said it creates a cleaner paper trail in case of audit. In the form, the "adjustment" for the ISO exercise was $0 since there was no spread between strike and FMV.

Thanks for sharing your real experience! That's super helpful to know about Form 3921 still being issued and the recommendation to file Form 6251 anyway. Makes sense to create that paper trail. Did you find any other unexpected issues or benefits when you actually went through with exercising underwater?

The main unexpected benefit was psychological - once I exercised, I stopped obsessing over the daily stock price movements since I already owned the shares. I could just hold them long-term without constantly evaluating whether to exercise. One practical issue: don't forget about the cash needed to exercise (paying the strike price) AND the additional cash needed for payroll taxes on any portion of shares that might be NSOs rather than ISOs. In my case, some of my "ISO" grants had partially converted to NSOs due to holding period rules, and that created a small regular income tax liability even though they were underwater.

That's a really good point. My previous employer did exactly this during the 2008 crash - cancelled all underwater options and reissued at a lower strike price. Saved a lot of employees from a bad situation. Definitely worth checking before exercising underwater.

That's a brilliant point about the expiration timeline! I hadn't considered that angle at all. So essentially you're trading cash (to exercise) for equity upside potential rather than just letting them expire worthless. How did you decide which underwater options to exercise if you had multiple grants at different strike prices? Did you prioritize the ones closest to expiration, or did you look at which strike prices were closest to current market value? I'm in a similar boat with some older grants that are pretty far underwater but approaching their 10-year mark.

I prioritized based on a combination of factors, but expiration timeline was definitely the primary consideration. For grants that were within 12-18 months of expiring, I exercised regardless of how far underwater they were - better to own the shares than let them expire worthless. For grants with more time remaining, I focused on those with strike prices closest to current market value since they had the best chance of recovery. I also considered my overall portfolio diversification - didn't want to put too much cash into company stock even if the tax implications were favorable. One thing that really helped was creating a spreadsheet with all my grants showing strike price, current FMV, expiration date, and potential cash outlay. This let me model different scenarios and see which combinations made the most sense given my risk tolerance and available cash. The visual really helped clarify which grants were worth exercising vs. letting expire.