For tech professionals, exercising ISOs is what most frequently creates an AMT tax bill. Selling those same ISO-acquired shares helps to recoup your AMT credit.
Last updated
© 30-40 Wealth Partners, LLC (2023). All rights reserved. See the Important Disclaimers page for important information
Exercising ISOs can result in the need to pay AMT if certain limits are exceeded. When AMT is paid, a credit is generated that can be recouped in future years. A strategy to accelerate the recoup of an AMT credit is to sell the ISO-acquired shares after a qualifying disposition has been met.
ISOs have unique tax treatment. Full details can be found in ISO Taxation. At a high level, the bargain element that exists when ISOs are exercised is not considered taxable income for standard taxation purposes, but is considered taxable income for AMT purposes. This difference is why exercising ISOs can also result in owing AMT.
What also occurs however, is that the ISO-acquired shares will have two different tax bases:
Standard tax basis: Strike price of the ISO option
AMT tax basis: The 409a price when the ISO was exercised
For more details see: ISO Taxation: Separate Tax Cost Basis for AMT vs. Standard Taxation
This difference in cost basis is beneficial, and helps accelerate the recoupment of the AMT credit when the ISO-acquired shares are sold. AMT credits are recoupable in future tax years, with the recouped amount each year being how much your standard tax calculation exceeds your AMT calculation. The different cost basis result in different capital gains when the ISO-acquired shares are sold, which widens the gap between (i) your standard tax calculation, and (ii) your AMT calculation in the year you sell the ISO-acquired shares, and thus allows you to recoup a larger amount of the AMT credit.
Note: special rules and strategies apply if the ISO-acquired shares will have a AMT capital loss when they are sold. For more details see Pair Capital Gains with AMT Capital Losses To Recoup AMT Tax Credit
Accelerate recoupment of AMT credits. If the ISOs were exercised when the 409a valuation was greater than the strike price, selling the ISOs after a qualifying disposition occurs should help you recoup a larger amount of AMT credit.
The ability to recoup AMT credits may be limited if shares are sold for an AMT capital loss. Special tax rules (and thus special tax strategies) apply if the ISO-acquired shares will have a AMT capital loss when they are sold. For more details see Pair Capital Gains with AMT Capital Losses To Recoup AMT Tax Credit
The sale will likely trigger long-term capital gains taxes to be owed. The recoupment of AMT credits is definitely beneficial, but the sale of the stock at a gain will also trigger long-term capital gains taxes to be owed.
You need to hold long enough to achieve a qualifying disposition. The above analysis presumes that you sell the ISOs only after achieving the time requirements for a qualifying disposition.
Can be done in parts. This is not an all or none situation. Every ISO-acquired share of stock has two costs bases, and as such, selling a portion of your ISO-acquired stock is a perfectly viable strategy to consider.
The year of sale can matter. As with all tax planning, some years may be more beneficial than others to conduct a sale of ISO-acquired stock.
AMT laws are scheduled to change in 2026. How AMT is calculated and applied changed in 2018, and is currently scheduled to revert in 2026. If you're conducting planning across multiple years, you will likely want/need to take this change into account.
If you have AMT credits and desire to sell your ISO-acquired stock (with different cost/tax bases). If you are planning on selling your stock, strategically understanding how your AMT credit recoupment can be accelerated should be an important part of your plan.
If you're concerned about your ability to recoup your AMT credit if/when AMT rules change in 2026. As of now, AMT rules that changed in 2018 are scheduled to revert back in 2026--where recoupment may become more challenging (especially for high income earners). Developing a strategy to accelerate recoupment prior to 2026 may be beneficial to you.
If you don't want to trigger long-term capital gains tax. Selling stock for a profit means capital gains taxes are owed. This strategy is no exception (although it is more confusing given the dual tax basis).
If you have limited or no AMT credits. In most normal tax years some AMT credits will be recouped. If you have a small AMT credit (or none at all), you don't need to try to accelerate the recoupment.
If you prefer to hold ISO shares long-term for upside appreciation potential. Investment planning typically trumps tax optimization. If you desire to hold (at least some of) the shares long-term, selling for tax purposes may not make sense.
