Multi-Year AMT Spread Riding

AMT spread riding is a multi-year strategy to exercise a large number of ISOs with minimal AMT impact.

Strategy Overview

AMT spread riding is a strategy used to smooth out the AMT tax burden over multiple years when exercising substantial ISO holdings. By strategically considering ISO/AMT tax rules that specify (1) some ISO exercises can be done each year without triggering AMT, and (2) ISO-acquired stock sales accelerate AMT tax credit recoup --> an individual can create a multi-year strategy of ISO exercises and sales that either does not trigger AMT, or only requires a minimal outlay for AMT.

Tax Details

ISOs have some unique AMT implications. But when appropriately considered and forecast, strategies exist to help minimize the impact. For individuals with a large number of ISOs that have significant value (e.g. a large bargain element), exercising all of the ISOs in the same year would likely result in a very large AMT bill.

If minimizing or avoiding an AMT is desired, and an individual is comfortable taking on the investment risk of holding positions for a longer period of time, one strategy is to (1) exercise a strategically intentional number of ISOs in a year, then (2) in future years both (i) exercise more ISOs, and (ii) sell the prior year ISO-acquired stock. The strategy can also flex a bit in regards to how many years the plan should take to implement, and the timeline can be shortened if/as the individual increases the amount of AMT bill they're willing to tolerate.

Tax-wise, the strategy takes into account, and optimizes for, two unique ISO/AMT tax rules: (1) some ISO exercises can be done each year before triggering AMT, and (2) ISO-acquired stock sales accelerate AMT tax credit recoup. With stable (or increasing) company stock prices, each year should have a larger "window" of ISO exercises that can be conducted without triggering AMT. Or, alternatively, an individual could set a maximum amount of AMT they're willing to pay, increasing the amount of ISO option they could exercise, thus reducing the number of years it takes to complete their AMT spread riding plan.

AMT spread riding is a powerful strategy, but it's not a simple one. It requires planning over many years, with careful consideration of your individual tax circumstances and potential changes in tax laws. The optimal strategy for one person might not be the best for another, so it's important to consult with a tax advisor to calculate the optimal AMT impact each year.

Key Benefits

• Allows an individual to avoid an AMT tax bill or target a maximum AMT bill in any single year. AMT spread riding helps you control your AMT bill through careful tax modeling and by spreading the exercise of ISOs over several years.

• Allows individuals with minimal cash resources to monetize ISOs in the most tax-optimal (qualifying disposition) way. There are a lot of ways to monetize ISOs with significant gains (e.g. selling some/all immediately to raise cash to exercise others). AMT spread riding requires a multi-year plan, but in ideal circumstances would allow an individual to monetize the value of their ISOs via qualifying dispositions (preferential tax treatment).

Key Considerations/Flags

• Investment Risk. By definition, AMT spread riding is a multi-year strategy. It allows the individual to capture preferential tax treatment, but the trade-off for that benefit is the individual must accept the investment risk of holding the position for a longer period of time compared to other selling/divestment strategies they could pursue (i.e. exercise and immediately sell).

• Requires planning over many years. Implementing AMT spread riding isn't a one-time decision. It requires careful planning over several years to ensure that the strategy effectively manages your AMT liability and maximizes the use of generated credits.

• Need to avoid AMT losses negating credits. One potential drawback of this strategy is that if the stock price decreases, the AMT credit you've generated could be more difficult to access (see pair capital gains with AMT capital losses). Therefore, it's important to be mindful of the investment risk (how the stock price will perform over time) when considering this strategy.

Strategy: When to Consider This and When to Avoid It

🟢 When to Consider This Strategy:

• Large ISO holdings. This strategy is most applicable if you have sizeable ISO holdings that have significant value. Spreading the exercise of these options over several years can help manage the tax impact and (ideally) provide a more predictable tax scenario.

• You believe in the company (and are confident in the stock price). AMT spread riding works best when the stock is flat or appreciating. Additionally, the strategy requires taking on single-stock investment risk for a longer period of time.

🔴 When to Not Use This Strategy:

• You do not believe in the company (and are not confident in the stock price). The strategy requires taking on single-stock investment risk for a longer period of time. If you're not able or willing to accept that investment risk, you should utilize alternate selling strategies (e.g. exercise and immediately sell).

• If your ISOs will expire soon. If you have ISOs that will expire within the next couple years, you will likely not have enough time to implement this strategy well.

• If you need cash. AMT spread riding is a multi-year strategy, with the majority of the cash receipts occurring in the later years. If your financial plan specifies a need for cash sooner, this strategy likely will not work for you.

• You anticipate a reduction in your Income. AMT spread riding generates AMT credits that can be recouped -- but a relatively stable or increasing income is largely required for the strategy to work. If you anticipate a reduction in your household income (e.g. you plan to take a sabbatical), this strategy will likely not work out favorably for your situation.

Example