Every March, we get the same email:
"I exercised in 2025. My accountant just ran the numbers. I owe how much?"
Sometimes it's $40,000. Sometimes it's $140,000. It's almost always due April 15. If that's you, read this carefully. And if you're planning to exercise in 2026 or beyond, this might save you from being in that same position.
When you exercise ISOs, you don't pay regular income tax immediately. But you might trigger AMT - Alternative Minimum Tax.AMT runs on a separate calculation. The IRS looks at the "bargain element" (the spread between your strike price and the Fair Market Value on the day you exercised) and treats it as income.
Even if:
- You didn't sell
- The company is still private
- No money hit your bank account
You exercised. On paper, you made money. The IRS wants its cut.
Let's make it concrete.
You exercise 50,000 ISOs. Strike price: $2. Fair Market Value (FMV): $12.
Spread: $10 per share (FMV − strike price)
Total bargain element: $500,000 (shares exercised × spread)
Add that to a $180,000 salary. Your AMT income is now $680,000. Once exemptions phase out and AMT rates kick in, you could easily be looking at a $100,000+ federal tax bill.The shares are still private. There's no liquidity event. But the tax is very real, and you're not alone in this situation.
This is where, we believe, the employees who come out ahead separate themselves. Before you exercise, model four numbers:
Bargain element
(FMV minus strike price) × shares
AMT income
your taxable income + bargain element
Tentative minimum tax
26% and 28% brackets applied to AMT income above the exemption
The actual check
tentative minimum tax minus your regular federal tax
That final number is what you may owe in cash. Once you see it clearly, you can make strategic decisions:
- Exercise fewer shares this year
- Split exercises across tax years
- Exercise before a 409A increase
- Use funding that covers both the strike price and expected tax exposure upfront
The employees who may get burned are the ones who run this model after they exercise. Don't be that person.
Equitybee does not provide tax or financial advice. Always consult a qualified professional about your specific situation.
AMT paid today often becomes a credit you can use in future years, after you sell and move back into the regular tax system.
So it's usually deferred, not lost.
But "deferred" doesn't help you write a six-figure check in April. Planning does.
Startup equity can create life-changing upside. It can also create unexpected obligations.The difference is rarely luck. It's usually preparation.
If the cost is what's holding you back, or the tax bill just landed, explore your options at equitybee.com/employees.
We're breaking down what happens to your options when your company gets acquired - and what most employees don't know until it's too late.
Equitybee does not provide tax or financial advice. Always consult a qualified professional about your specific situation. Funding is subject to eligibility and terms. Past outcomes are not indicative of future results.
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