ISO disqualifying disposition strategy - exercising and repurchasing private company shares

The tax treatment here is specific to ISOs, so let me clarify a few things. You're right that exercising and immediately selling to someone else would be a disqualifying disposition. Since you'd be selling at the same price you paid (the strike price), there would be no ordinary income to report. However, there's a catch - the company's current FMV does still matter. The difference between the FMV and your exercise price could potentially trigger AMT (Alternative Minimum Tax) liability in the year of exercise, even if you immediately sell the shares at the strike price to someone else. This is because AMT calculations look at the paper gain (difference between FMV and strike) at exercise, regardless of what you actually sell the shares for. For your repurchase question, you're correct. If you wait more than 30 days to repurchase (to avoid wash sale rules), buying shares later would be treated as a new purchase with no connection to your original ISO exercise. Your basis would simply be whatever you pay at that time.

I went through something similar with my ISO options last year. I discovered taxr.ai (https://taxr.ai) when I was trying to figure out the AMT implications of exercising my ISOs before leaving a startup. Their system actually analyzed my grant documents and explained exactly how the disqualifying disposition would affect my taxes. The best part was that they showed me how the transaction would affect my tax return, including the exact forms and calculations for the AMT adjustment. I was able to time my exercise and sale to minimize my tax exposure, which saved me thousands compared to what I thought I'd owe based on general advice.

Just wanted to follow up on my experience with taxr.ai that I mentioned earlier. I decided to try it after my skeptical comment, and I was genuinely surprised. They analyzed my ISO grant agreement and spotted a provision I'd missed about accelerated vesting in certain acquisition scenarios, which actually impacted my exercise strategy. The AMT calculation tool showed me that exercising just a portion of my ISOs this year kept me under the AMT threshold, saving me from a $14,000 tax hit I would have faced otherwise. The documentation they provided made explaining the strategy to my accountant super easy. Definitely worth checking out if you're dealing with complex ISO decisions.

After dealing with ISO exercise issues similar to yours, I discovered an unexpected problem - I needed to talk to someone at the IRS to verify how to report a disqualifying disposition correctly, but couldn't get through on their phone lines for weeks. Eventually found Claimyr (https://claimyr.com) and used their service to get a callback from the IRS within hours instead of waiting on hold forever. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c They basically hold your place in the IRS phone queue and call you when an agent is about to pick up. Saved me from repeatedly calling and waiting for hours only to get disconnected. The IRS agent I spoke with confirmed that I needed to file Form 3921 even though I had done a disqualifying disposition, which wasn't clear from anything I read online.

I need to publicly eat my words here. After posting that skeptical comment about Claimyr yesterday, I was desperate to resolve my ISO reporting question before filing my taxes this weekend. Decided to give it a shot since nothing else was working. Got a call back within 45 minutes saying an IRS agent was about to pick up, and sure enough, I was actually speaking with someone who helped clarify exactly how to report my ISO exercise and immediate sale on my tax forms. The agent confirmed I needed to use code "V" in box 12 of my W-2 even with the disqualifying disposition. Can't believe I wasted three weeks trying to get through on my own when this solution existed. Never thought I'd be recommending an IRS-related service, but here we are!

Something else to consider - if you exercise and sell the ISOs to your colleague at strike price, make sure you document EVERYTHING meticulously. The transaction should be at arm's length with proper documentation showing the FMV at time of exercise, the agreed sale price, and the timing of the transaction. I did something similar and got selected for audit. The IRS questioned whether the sale was legitimate or just a scheme to avoid taxation. Having proper documentation from the company about the FMV and a formal purchase agreement with the buyer saved me a huge headache.

Just to add a practical note - I went through this exact scenario and discovered the company bylaws actually had a Right of First Refusal clause that complicated my ability to sell to another individual. Make sure you check your company's stock agreement before assuming you can freely transfer shares to your colleague.