Equity taxes · Stock options
Stock option taxes: ISOs, NSOs and AMT
You exercised, or you’re about to. What will it cost?
Stock options are taxed very differently depending on whether they’re ISOs or NSOs. NSOs are taxed as wages the day you exercise. ISOs usually aren’t, but holding the shares can trigger the alternative minimum tax (AMT), with nothing withheld to cover it. Here’s how each one works, how AMT is calculated, and what to check before the year ends.
Vested Tax · Reviewed by a licensed CPA · Updated October 2026 · Covers tax year 2026
The short answer
Stock options give you the right to buy company shares at a fixed price, called the strike or exercise price. The tax depends on the type. With NSOs (non-qualified stock options), the spread when you exercise (the share value minus the strike price) is wage income on your W-2, and your employer withholds tax on it. With ISOs (incentive stock options), exercising usually creates no regular income tax, but if you hold the shares past year-end, the spread counts toward the alternative minimum tax (AMT). Nothing is withheld for AMT, so it often shows up as a surprise when you file (IRS Topic 427, Stock options).
Grant
No tax
No tax
Vest
No tax
No tax
Exercise
Spread is wage income, with withholding
No regular tax. Spread counts for AMT if you hold the shares past year-end
Sale
Capital gain or loss on the change since exercise
Qualifying sale: all gain over the strike price is long-term capital gain. Disqualifying sale: part is taxed as ordinary income
The vest row assumes ordinary options that you exercise after they vest. Early exercise works differently; see common mistakes.
ISO or NSO? How to tell
Your grant agreement or equity portal says which type you have. Some other clues:
ISOs are only for employees
Advisors, contractors and board members get NSOs.
After an ISO exercise, you get Form 3921
It comes from your company. After an NSO exercise, the spread shows up on your W-2 instead.
The $100,000 limit
If ISOs worth more than $100,000 (measured at the grant-date share value) first become exercisable in one year, the excess is treated as NSOs. One grant can be part ISO and part NSO.
Leaving your job
To keep ISO treatment, you generally have to exercise within 3 months after you leave (1 year if you leave because of a disability; different rules apply after death). Options exercised later are taxed as NSOs, even if your plan gives you longer to exercise. Your plan’s exercise window is a separate deadline and can be shorter.
Source: IRS Publication 525
NSOs: taxed when you exercise
When you exercise NSOs, the spread is taxed as wages: federal and state income tax, Social Security (up to the annual wage base) and Medicare. Your company withholds on it, usually at the flat 22% federal rate for supplemental wages, or 37% on one employer’s supplemental wages above $1 million in a year (IRS Publication 15).
That can leave the same shortfall as RSUs: if the spread is taxed in the 32%, 35% or 37% bracket, 22% withholding doesn’t cover it. Our RSU guide walks through the math.
Your cost basis in NSO shares is the strike price plus the spread you were taxed on, which is the share value on the exercise date. When you sell, only the change since exercise is a capital gain or loss: short-term if you held the shares for one year or less, long-term if longer.
ISOs: no regular tax at exercise, but watch AMT
Exercising ISOs creates no regular income tax and no withholding. What happens next depends on when you sell.
Qualifying sale
If you sell more than 2 years after the grant date and more than 1 year after exercising, the whole gain over the strike price is long-term capital gain. That’s the tax advantage ISOs are designed for.
Disqualifying sale
If you sell sooner, part of the gain is taxed as ordinary income: generally the smaller of the spread at exercise or your actual gain. Any gain above the spread is capital gain. That income usually appears on your W-2, but your employer isn’t required to withhold federal income tax on it, so it often isn’t prepaid (IRS Publication 525).
Selling in the same year
If you exercise and sell the shares in the same calendar year, it’s a disqualifying sale, and the spread on those shares doesn’t count for AMT. That includes a same-day “exercise and sell.”
Holding past year-end
If you exercise and still hold the shares on December 31, the spread is an AMT adjustment for that year, even though you sold nothing and received no cash (IRS Instructions for Form 6251).
How AMT works
AMT is a second way of calculating your federal tax. You figure your tax both ways and pay whichever is higher.
Regular tax
The tax on your normal return.
The AMT calculation
Starts from your income, adds back certain items, including the ISO spread on shares you held at year-end, and drops the standard deduction. It then subtracts an exemption and applies a 26% or 28% rate.
If the AMT figure is higher
The difference is your AMT, added to your bill.
For 2026, the AMT exemption is $90,100 for single filers and $140,200 for married couples filing jointly. It starts shrinking once AMT income passes $500,000 (single) or $1,000,000 (joint). The 28% rate applies to AMT income above $244,500 after the exemption.
California has its own AMT calculation, using a 7% rate, and ISO exercises count toward it too. It isn’t a flat 7% on the spread: like the federal version, you owe California AMT only if that calculation comes out higher than your regular California tax. A large exercise can trigger AMT in both places.
Because the ISO spread is the main driver, the size of your exercise and its timing matter most. Modeling them before you exercise is where planning helps.
Example: $30,000 to exercise, $200,000 of spread
Illustrative and simplified. A single filer in tax year 2026, a full-year California resident with no dependents, the standard deduction, no other income or credits, no prior AMT credits, and $29,000 federal plus $11,000 California withheld from salary. The ISOs are vested, qualify as ISOs, and aren’t sold during 2026.
Alex: $160,000 salary, 10,000 ISOs at a $3 strike, shares worth $23, held past year-end
About $51,400 of extra tax
Federal and California AMT from an exercise that put no cash in Alex’s pocket
Cash to exercise
10,000 × $3 = $30,000 to buy the shares.
The spread
($23 − $3) × 10,000 = $200,000. No regular tax is due on it, and nothing is withheld.
Federal AMT
The exercise adds about $43,500 of federal AMT.
California AMT
About $7,800.
Due at filing
Together, about $51,400 of extra tax. After salary withholding, about $49,000 is due at filing.
Part of that AMT may come back in later years as a credit (below). It isn’t guaranteed, and it can take years.
Getting AMT back: the AMT credit
AMT caused by an ISO exercise is mostly a timing difference, so it creates a minimum tax credit. You can use it in a later year when your regular tax is higher than your AMT calculation, and unused credit carries forward with no expiration (About Form 8801).
Recovery is often slow
Each year, the credit you can use is limited by how much your regular tax exceeds your AMT calculation. Selling the ISO shares can change that calculation, but it doesn’t automatically release the whole credit.
You have two cost bases
For regular tax, your basis in ISO shares is the strike price. For AMT, it’s the share value at exercise. Tracking both matters when you sell, because the AMT basis is what lets the credit work.
California has its own minimum tax credit, tracked separately.
Timing and paying the tax
December vs. January
The AMT counts in the year you exercise, and it’s part of that year’s tax, not just a bill for April. A December exercise affects that year’s last estimated payment, due January 15. Exercising in January gives you the whole year to see how the share price moves, and the option of selling in the same year, which removes the AMT on those shares. It doesn’t push the tax into the next year.
No withholding on ISOs
Since nothing is withheld on an ISO exercise, you may need estimated payments during the year or extra W-4 withholding to avoid an underpayment penalty. Penalties are figured by quarter, so payment timing matters, not just the total; if most of the income came late in the year, the annualized income method on Form 2210 can help. A balance due and a penalty aren’t the same thing; our RSU guide explains the safe harbor (IRS Publication 505).
Cash to exercise and cash for tax
An ISO exercise can cost cash twice: the strike price to buy the shares, then the AMT, through estimated payments or when you file. At a private company, there may be no way to sell shares to cover either.
Common mistakes
Leaving a job without checking the 3-month rule
ISOs exercised more than 3 months after you leave (1 year after a disability-related departure) are taxed as NSOs, so the spread becomes wage income instead of an AMT item. Check your plan’s own exercise deadline too; it’s separate and can be shorter.
Early exercise without an 83(b) election
Some companies let you exercise before your options vest. An 83(b) election must be filed within 30 days after the shares are transferred to you, with no extension. What it does depends on the option type. For NSOs, it makes the spread taxable as wages when you exercise, often when it’s small, instead of when the shares vest. For ISOs, there’s no regular tax either way; the election affects only the AMT, by counting the spread at exercise instead of at vesting.
Using the wrong cost basis
Your broker’s Form 1099-B often shows only the strike price as your basis. After an NSO exercise or a disqualifying ISO sale, the spread was already taxed as income and has to be added to your basis on Form 8949, or you pay tax on it twice (IRS Instructions for Form 8949).
Forgetting the AMT credit
If you paid AMT in an earlier year, Form 8801 needs to be carried forward every year until the credit is used. It’s easy to lose when you switch preparers or software.
Want a CPA to check it?
Option taxes depend on your income, the exercise size, timing and whether you sell, so a general estimate only goes so far. There are two ways we help:
Already exercised this year?
A tax projection models your full year, including an AMT check on ISOs you exercised, and tells you how much to pay and when. You get a written report with your projected balance and recommended payment amounts and dates. One flat fee.
Planning future exercises?
Deciding how many ISOs to exercise, and when, is part of our Tax Planning & Filing service, where we model the options with you through the year and file your return.
Flat fees, no hourly billing.
Stock option tax questions
What’s the difference between ISOs and NSOs for taxes?
The difference between ISOs and NSOs is when and how they’re taxed. NSOs are taxed as wage income when you exercise, with withholding. ISOs usually create no regular tax at exercise, but the spread can trigger the alternative minimum tax (AMT) if you hold the shares past year-end, and a qualifying sale later gets long-term capital gain treatment.
Do I pay tax when I exercise stock options?
You pay tax when you exercise NSOs: the spread between the share value and the strike price is wage income on your W-2. Exercising ISOs creates no regular income tax, but if you still hold the shares at year-end, the spread counts toward the alternative minimum tax.
Why do I owe AMT if I didn’t sell any shares?
You can owe AMT without selling because the AMT calculation counts the ISO spread on shares you exercised and still held at year-end, even though you received no cash. If that pushes your AMT calculation above your regular tax, you pay the difference, and nothing was withheld to cover it.
How can I reduce AMT on ISOs?
AMT on ISOs depends mainly on how many shares you exercise and when. Exercising fewer shares in a year, spreading exercises across years, or selling shares in the same year as the exercise can reduce or remove the AMT. Which mix makes sense depends on your income and plans, so model it before you exercise.
Will I get my AMT back?
AMT from an ISO exercise usually creates a minimum tax credit you can use in later years when your regular tax is higher than your AMT calculation. Unused credit carries forward indefinitely on Form 8801, but recovery can take years, selling the shares doesn’t automatically release all of it, and it isn’t guaranteed.
What is a disqualifying disposition of ISOs?
A disqualifying disposition is a sale of ISO shares within 2 years of the grant date or within 1 year of exercising. Part of the gain, generally the smaller of the spread at exercise or your actual gain, is taxed as ordinary income instead of long-term capital gain.
What is Form 3921 used for?
Form 3921 is the form your company sends after you exercise ISOs. It shows the grant date, exercise date, strike price, share value at exercise and number of shares, which you need to figure your AMT adjustment and your cost basis when you sell.
Do I need estimated tax payments after exercising ISOs?
You may need estimated payments after exercising ISOs, because nothing is withheld on the exercise. If the exercise creates AMT and your withholding won’t meet a safe harbor, estimated payments during the year or extra W-4 withholding can help avoid an underpayment penalty. The AMT belongs to the exercise year, so don’t wait for April.
What happens to my ISOs if I leave my company?
If you leave your company, ISOs generally keep their ISO tax treatment only if you exercise within 3 months after your last day, or 1 year if you left because of a disability. Options exercised after that are taxed as NSOs, even if your plan allows a longer exercise window.
Does California have AMT?
California has its own alternative minimum tax calculation, using a 7% rate, and ISO exercises count toward it. It isn’t a flat 7% on the spread; you owe California AMT only if that calculation exceeds your regular California tax. A large ISO exercise can create both federal and California AMT, and each has its own credit for later years.
This page is general information, not tax advice for your situation. Tax rules change, and the right answer depends on your full picture.