Understanding ISO stock options, tax implications, and leveraging capital loss carryover in 2025

I've recently been granted 1,000 ISO options to purchase my company's stock at $11 per share. The options were granted before we went public, and honestly I never bothered exercising them since they might have ended up worthless. Well, our company finally had its IPO last month. Here's my current situation: - 1,000 ISO options with $11 strike price - Current fair market value (FMV) of the stock is $257 From what I understand about the tax situation: If I exercise all 1,000 options, I'll be taxed on (257-11) * 1,000 = $246,000 as ordinary income. Here's the complication - I'm sitting on about $120k in capital loss carryover from some terrible investing decisions during the market crash and afterwards. I was hoping I could exercise my options and have my capital loss carryover offset some of the gains from the options by $120k. But I think capital gains only get calculated when I actually sell the shares after exercising, right? Questions: 1. Should I have exercised when the FMV was closer to my strike price? For example, if my strike was $11 and FMV was $14, I'd only pay $3,000 in ordinary income, and later the $243,000 would be capital gains when I sell? This would have let me offset with my loss carryover and get the lower capital gains rate. 2. Since I waited until FMV hit $257, does this mean I'm stuck paying mostly ordinary income tax at a higher rate? 3. What about AMT implications if I exercise and sell within the same tax year? This is my first rodeo with stock options and the tax implications are making my head spin. Any help would be appreciated!

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18 comments

Heather Tyson

•8M

You've got the general idea, but there are some misunderstandings about ISOs that I should clear up: ISOs (Incentive Stock Options) actually have special tax treatment. When you exercise ISOs, you don't pay ordinary income tax immediately. Instead, the difference between your strike price and FMV becomes a "preference item" for Alternative Minimum Tax (AMT) purposes. If you hold the shares for at least 1 year after exercise and 2 years after the grant date, any gains would be long-term capital gains. If you exercise and sell immediately (disqualifying disposition), then yes, the spread would be treated as ordinary income. Regarding your capital loss carryover - you're right that it can only offset capital gains, not ordinary income. And capital gains only occur when you sell the shares. For your questions: 1. Yes, exercising when the spread was smaller would have resulted in a smaller AMT impact. The best time to exercise ISOs is usually as early as possible when the spread is minimal. 2. If you exercise now and sell immediately, you'll have ordinary income of $246,000. If you exercise and hold, you'll have an AMT preference item of $246,000 (which may result in AMT tax). 3. If you exercise and sell in the same year (disqualifying disposition), AMT doesn't come into play. You'll just pay ordinary income tax on the spread.

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Heather Tyson

•8M

For option 1 (exercise and hold), your capital loss carryover won't help with the immediate AMT hit. The AMT calculation essentially adds back certain "preference items" (including ISO spread) to your income and applies a different tax calculation. You'd calculate taxes both the regular way and AMT way, then pay whichever is higher. For option 2 (exercise and sell immediately), the spread becomes ordinary income, not capital gains, so your capital loss carryover won't offset it directly. Your capital loss carryover would only help when you have actual capital gains. If you exercise now and hold for over a year before selling, any appreciation beyond the $257 FMV would be capital gains that could be offset by your losses.

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Jenna Sloan

•8M

I was in a similar situation last year with ISO options and learned about taxr.ai (https://taxr.ai) which helped me figure out the best tax strategy. The tool simulated different exercise scenarios and showed me the tax implications including AMT calculations. It even helped me build a multi-year exercise strategy to minimize my tax burden. What I found particularly useful was that it showed me exactly how my capital loss carryover would interact with different exercise and selling strategies. It recommended a partial exercise approach that saved me thousands in taxes by spreading the AMT impact across multiple years.

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Jenna Sloan

•8M

The projections were spot-on when I checked them against what my accountant calculated manually. Yes, it does account for state taxes including California's high rates - that was crucial for me since I'm in a high-tax state too. For AMT calculations, it handles all the complexity automatically - it factors in exemption amounts, phaseouts, alternative tax rates, and shows you exactly when the AMT crossover happens. It even helped me identify the optimal number of options to exercise each year to minimize my total tax burden across multiple years.

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Sasha Reese

•8M

I just wanted to follow up about taxr.ai that I asked about earlier. I ended up trying it after our conversation, and I'm actually impressed. I was planning to exercise all my options this year but the analysis showed I'd trigger over $50k in AMT by doing that. Instead, I'm now exercising just enough to stay under the AMT threshold this year and spreading the rest over the next two years. It also showed me how my capital loss carryovers would offset future gains if I stage my selling strategy correctly. The multi-year planning feature was eye-opening - showed me I could save almost $30k in taxes with the right exercise/hold/sell strategy compared to my original plan. Definitely worth checking out if you're dealing with ISOs.

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Muhammad Hobbs

•8M

Anyone else find it impossible to get through to the IRS to ask about ISO and AMT questions? I tried calling them repeatedly about similar options questions last month and kept getting disconnected or waiting for hours. Finally used Claimyr (https://claimyr.com) and got connected to an IRS agent in about 20 minutes. They have this demo video that shows how it works: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with was surprisingly helpful with my ISO question and confirmed that I needed to file Form 6251 for AMT calculations when exercising ISOs. They also cleared up my confusion about Form 3921 reporting requirements from my employer.

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Diez Ellis

•8M

Well I'll be damned. I tried that Claimyr service after responding to your comment. After weeks of trying to get through to the IRS about my ISO audit situation, I got connected in about 30 minutes. The agent was able to pull up my case, explain exactly what documentation they needed from me, and even gave me a direct fax number to send the forms. Turns out I had calculated my AMT wrong on my Form 6251 when I exercised my ISOs last year (missed some of the phase-out rules), but the agent walked me through what I needed to correct. Saved me from potentially hiring a tax attorney just to figure out what was going on with the audit. Who knew the IRS could actually be helpful when you can reach them!

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Vanessa Figueroa

•8M

You're absolutely right, and I should have been more precise. 83(b) elections apply to restricted stock awards (RSAs) or early exercises of unvested options, not standard ISO exercises as in your situation. For your situation with vested ISOs at a now-public company, you're dealing with the standard ISO tax rules that others have mentioned. Your main considerations are the timing of exercise relative to AMT implications and holding periods for qualifying dispositions. Apologies for the confusion.

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