The $115,000 ISO Tax Trap: Why Exercising Stock Options in One Year Can Backfire

Gerelyn Terzo

Tue, April 21, 2026 astatine 6:53 AM CDT 6 min read

Exercising inducement banal options feels similar a windfall moment. You person the grant, the banal has tally up, and you are yet converting years of vesting into existent value. What galore employees observe excessively precocious is that the taxation strategy treats that infinitesimal precise otherwise than they expected, and the punishment for getting it incorrect tin tally good into six figures.

• Who it affects: Employees astatine backstage oregon nationalist companies who clasp ISOs

• The trigger: Exercising ISOs and holding the shares alternatively than instantly selling

• The hidden cost: The dispersed betwixt onslaught terms and just marketplace worth astatine workout is an AMT penchant item

• The stakes: A azygous ample workout tin make a taxation measure of $70,000 to $100,000 oregon more, payable adjacent if the banal aboriginal collapses

This script plays retired perpetually connected idiosyncratic concern forums. A Reddit idiosyncratic successful r/personalfinance described exercising a ample ISO artifact successful a azygous year, lone to person a taxation measure that exceeded what the shares were worthy by the clip they sold. It is 1 of the astir reliably achy mistakes successful equity compensation.

ISOs transportation a genuine taxation advantage: nary mean income taxation astatine exercise, and semipermanent superior gains attraction astatine merchantability if you conscionable the holding play requirements (two years from assistance date, 1 twelvemonth from workout date). The drawback is the Alternative Minimum Tax.

The AMT runs arsenic a parallel taxation system. The dispersed betwixt your ISO workout terms and the stock's just marketplace worth astatine workout counts arsenic AMT income, adjacent though you person nary currency and beryllium nary regular income taxation successful that year. The AMT complaint connected this income is 28% supra a definite threshold.

An worker who exercises $500,000 worthy of ISOs successful a azygous year, buying shares astatine a $10 onslaught terms erstwhile the banal is trading astatine $110, generates $500,000 successful spread. At the 28% AMT rate, the gross AMT vulnerability connected that dispersed is astir $140,000. After applying the 2026 single-filer AMT exemption of $90,100, the nett AMT liability tin inactive scope astir $115,000. That taxation is payable adjacent if the banal aboriginal declines successful worth earlier the shares are sold.

The 2026 rules marque this peculiarly relevant. The One Big Beautiful Bill Act, enacted July 4, 2025, permanently extended the higher AMT exemption amounts from the 2017 Tax Cuts and Jobs Act, but reset the phase-out thresholds to $500,000 for azygous filers and $1,000,000 for joined couples filing jointly, with a phase-out complaint of 50 cents per dollar. Higher earners suffer the exemption faster, pushing much ISO exercisers into AMT exposure.