Incentive Stock Options tax

Incentive stock options cost nothing in regular tax when you exercise. They can still generate a tax bill through the alternative minimum tax, on a paper gain you have not realized and may never realize.

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Two taxable events, not one Equity compensation creates two taxable events: (1) ordinary income when shares vest or options are exercised, (2) capital gain/loss when shares are sold. Misunderstanding this two-layer structure is the most expensive equity tax mistake.

Why an exercise you never sold can still cost you

Exercising an ISO costs nothing in regular tax. It does create an AMT preference item: FMV at exercise minus strike price = AMT preference item. For 2026 the AMT exemption is $90,100 single and $140,200 married filing jointly, phasing out from $500,000 and $1,000,000 respectively. AMT runs at 26% and 28% above $244,500.

The trap: Large ISO exercise in single year can trigger AMT even without selling shares. Strategy: exercise in tranches across multiple years to stay below AMT exemption phaseout.

The other equity instruments

What this covers

Federal treatment for the 2026 tax year, from the verified dataset.
Single filer taking the standard deduction in the worked figures.
Equity income stacks on top of salary, so it fills your highest brackets, the figures reflect that rather than taxing it in isolation.
Informational only, not tax advice. Equity decisions are worth a professional's time.