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Stock option exercise tax + cost calculator
Project the cost + tax to exercise NSO or ISO stock options at IPO or before — strike price + bargain element + ordinary or AMT tax.
Total cash required (exercise + tax)
Show the work
- Exercise cost (strike × shares)$125,000
- Immediate tax owed$217,000
- Bargain element$775,000
Exercising options — the hidden cash cost
The exercise cost (strike × shares) is the obvious number. The tax cost — especially for ISOs triggering AMT — is often as large or larger and surprises early-stage employees who don't have liquidity.
NSO vs ISO at exercise
- NSO: bargain element (FMV − strike) taxed at ordinary income rates IMMEDIATELY at exercise. Withholding may be required.
- ISO: no regular tax at exercise BUT bargain element is an AMT preference — may trigger Alternative Minimum Tax. AMT credit recoverable in future years when regular tax > AMT.
The math
Default scenario: 50,000 shares × $2.50 strike, current FMV $18:
- Exercise cost: $125,000
- Bargain element: ($18 − $2.50) × 50,000 = $775,000
- ISO AMT estimate: $775,000 × 28% = ~$217,000
- Total cash required: $342,000 before any sale
For most early employees, this is a deal-breaker without one of:
- Cash-rich exercise (rare)
- Same-day exercise + sell (loses ISO LTCG benefit)
- Option financing (Quid, ESO Fund — 8-12% APR, 25%+ of upside)
The strategic choices
- Early exercise (83(b) election): exercise at low strike when bargain element is small/zero. AMT trivial, future appreciation = LTCG.
- Exercise at IPO + sell some: sell enough to cover the AMT, hold the rest for LTCG.
- Exercise + hold ≥1 yr post-exercise + ≥2 yrs post-grant: qualifies as ISO Qualifying Disposition — bargain element converts to LTCG.
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