Compare the after-tax profit of Incentive Stock Options (ISOs) versus Non-Qualified Stock Options (NSOs). See ordinary income tax at exercise, capital gains at sale, and potential AMT exposure on ISOs — so startup employees can plan exercise and sale timing.
After-tax profit & AMT
Both Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) give you the right to buy company stock at a fixed strike price, but the IRS taxes them very differently — and that difference can be worth thousands at a startup exit.
With an NSO, the spread between the fair market value and your strike price at exercise is taxed immediately as ordinary income (and payroll tax). Any further gain from exercise to sale is a capital gain. With an ISO, there's no regular income tax at exercise — and if you hold the shares more than 1 year after exercise and 2 years after grant (a "qualifying disposition"), your entire profit from strike to sale is taxed at the lower long-term capital gains rate. The catch: the ISO bargain element is an Alternative Minimum Tax (AMT) preference item, which can create a surprise tax bill in the year you exercise even though you haven't sold. A "disqualifying" ISO sale (too early) is taxed like an NSO.
Qualifying ISOs tax the whole gain at long-term capital gains rates — potentially the lowest total tax.
The ISO spread at exercise is an AMT preference — you can owe tax before selling a single share.
1 year after exercise + 2 years after grant turns an ISO sale into a low-taxed qualifying disposition.
NSOs are simpler — ordinary tax on the spread at exercise, capital gains on the rest. No AMT.
Equity is a huge part of startup pay in the United States, yet the tax rules trip up thousands of employees every year — which is why "ISO vs NSO," "stock option tax calculator," and "AMT on ISO exercise" are heavily searched. Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) are taxed very differently, and the gap can be worth tens of thousands at an acquisition or IPO. This calculator compares the after-tax profit of each, including the dreaded Alternative Minimum Tax on ISOs.
Hold ISO shares more than one year after exercise and two years after grant and your entire gain is taxed at low long-term capital gains rates — but exercising and holding can trigger AMT in that year before you have sold anything. NSOs avoid AMT but tax the spread as ordinary income at exercise. Model both to plan your exercise and sale timing.
An early employee has 10,000 options at a $1 strike, $6 FMV at exercise, sold at $15. Held long enough for a qualifying ISO disposition, the entire $140,000 gain is taxed at long-term rates — but exercising and holding triggers an AMT preference on the $50,000 spread. As NSOs, the $5/share spread is ordinary income at exercise. The calculator shows which nets more.
U.S. startup employees, executives, and equity holders deciding when to exercise and sell incentive (ISO) or non-qualified (NSO) stock options, and anyone estimating Alternative Minimum Tax exposure.
Incentive stock options and non-qualified options are taxed on entirely different schedules. An NSO taxes the spread between strike and fair market value as ordinary income at exercise, with payroll tax, and the employer withholds. An ISO triggers no regular income tax at exercise at all — but the spread is an alternative minimum tax preference item, which routinely produces a large and unexpected AMT bill. Hold ISO shares more than two years from grant and one year from exercise and the entire gain is long-term capital gain; sell earlier and it becomes a disqualifying disposition taxed like an NSO.
NSO at exercise: ordinary income = (FMV − strike) × shares, plus payroll taxISO at exercise: $0 regular tax, but (FMV − strike) × shares is an AMT preferenceISO qualifying disposition: entire gain is long-term capital gainHolding test: >2 years from grant AND >1 year from exercisewhere:
Assumptions: AMT paid on an ISO exercise generates a credit usable in later years, so it is partly a timing cost rather than a permanent one. Exercising a private company's ISOs can create a tax bill on shares you cannot sell — the classic startup trap.
Compare both treatments at exercise on identical economics.
ResultNSO costs $32,000 at exercise; ISO costs $0 regular tax but ~$28,000 of AMT
The ISO advantage is real but conditional on surviving the holding period and on the shares having value when you can finally sell. Exercising early in the calendar year gives the longest window to decide: if the price collapses before year end, selling in the same year is a disqualifying disposition that also eliminates the AMT preference.