Understanding ISO Stock Options, Tax Implications, and Using Capital Loss Carryover

You've got the general idea but there are a few important details to clarify about ISOs (Incentive Stock Options). When you exercise ISOs, you don't actually recognize ordinary income for regular tax purposes immediately. That's what makes ISOs special compared to NSOs (Non-qualified Stock Options). However, the difference between the FMV ($200) and your strike price ($8) - which is $192,000 in your case - becomes a "preference item" for Alternative Minimum Tax (AMT) calculations. If you exercise and hold the shares, you'll likely trigger AMT. If your capital loss carryover is from regular capital losses, it unfortunately won't offset the AMT income from the ISO exercise. If you exercise and sell within the same calendar year (a "disqualifying disposition"), you'll lose the potential ISO tax benefits and the entire spread ($192,000) becomes ordinary income. In this scenario, your capital loss carryover could offset up to $3,000 of ordinary income per year, with the remainder offsetting capital gains. To answer your other question: Yes, exercising when the spread was smaller would have been ideal for tax purposes. That's a common strategy - exercise early when the spread is minimal to start your capital gains holding period.

I went through something similar last year with my company's IPO. I found this amazing tool called taxr.ai (https://taxr.ai) that helped me figure out the optimal strategy for exercising my ISOs. It runs different tax scenarios based on your specific situation, including capital loss carryovers like yours. I was in a similar boat with about $60k in capital losses and wasn't sure how to handle my ISOs. The tool showed me that in my case, exercising a portion each year rather than all at once would minimize my tax hit. It also helped me understand exactly how AMT would impact me in different scenarios. Might be worth checking out since stock option tax planning is super situation-specific, and a few different decisions can save you tens of thousands in taxes.

I tried taxr.ai after seeing it mentioned here and WOW - it saved me from making a huge mistake with my ISOs. I was about to exercise everything at once this year, but the tool showed me I'd trigger over $45k in additional AMT if I did. Instead, I'm now exercising in batches over 3 years which will save me about $30k in taxes overall. It also helped me understand exactly how my capital losses would (and wouldn't) offset the various kinds of income. Worth every penny for anyone dealing with stock options. The visualization of different exercise strategies side-by-side made it super clear what I should do.

One thing nobody's mentioned yet - if you're having trouble reaching the IRS to get clarification on your specific situation (which is common with complex ISO questions), I'd recommend using Claimyr (https://claimyr.com). I was on hold with the IRS for HOURS trying to get answers about my stock options and AMT situation. Claimyr got me connected to a real IRS agent in about 20 minutes instead of the 3+ hour wait I was experiencing before. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent was actually really helpful with my ISO questions and confirmed that my understanding of the AMT impact was correct. They also helped me understand how to properly report everything on my tax forms.

I need to apologize for my skepticism about Claimyr. I tried it yesterday after filing an amended return related to my ISO exercise (had to correct how I reported AMT). I was dreading the typical 2+ hour hold time, but Claimyr actually got me through to an IRS agent in about 25 minutes. They called me when they had an agent on the line, and I was able to confirm exactly how to report my ISO exercise properly. The agent confirmed that my capital loss carryover would only offset up to $3,000 of ordinary income, but gave me some options for timing my stock sales over the next few years to maximize the use of my losses. Definitely worth it when dealing with something as complicated as stock options and AMT.

Some practical advice from someone who's been through this: unless you're confident the stock price will hold or increase, consider exercising and selling in the same year (disqualifying disposition). Yes, you'll pay ordinary income tax rates on the full $192k spread, but you remove all market risk. I've seen too many people exercise, hold for long-term capital gains treatment, watch the stock tank, and still owe huge AMT bills on phantom gains. In your case, with a $192k spread on a newly IPO'd company, that's a massive risk to take just for tax benefits. Remember, a bird in hand ($192k minus taxes) is worth two in the bush (potential tax savings but market risk).

Has anyone used a tax accountant specializing in stock options? I'm getting conflicting advice from different online sources, and I'd rather just pay someone knowledgeable to handle this for me.

One thing to consider is whether your company allows a "cashless exercise" option. With the spread between $8 and $200 being so large, you'd need $8,000 cash to exercise all options, plus potentially a large AMT bill. A cashless exercise would let you exercise and immediately sell enough shares to cover your costs, then keep the remaining shares. This is essentially a partial disqualifying disposition but can be a good middle ground if you don't have the cash on hand for a full exercise.

This is a complex situation that really highlights why ISO planning should ideally start early! Given your $90k capital loss carryover, you're right that it won't help with AMT on the ISO exercise, but there are still some strategic considerations. One approach worth exploring: if you're comfortable with some market risk, consider exercising just a portion of your options now (maybe 200-300 shares) and spreading the rest over the next year or two. This could help minimize the AMT hit while still capturing some gains. Also, timing matters for your capital loss usage. If you do a disqualifying disposition, you'll have $192k in ordinary income but can only use $3k of your losses against it this year. However, any capital gains you generate from other investments or future stock sales can be fully offset by your loss carryover. Given the volatility risk Isaac mentioned with newly public companies, I'd lean toward taking at least 50-70% of your gains off the table immediately after lockup expires. You've already won the lottery here - don't risk losing it all for tax optimization. Have you checked if your company offers any tax gross-up benefits or financial planning resources for employees dealing with stock options? Many tech companies provide these services specifically because ISO taxation is so complex.