The same option spread is taxed on completely different timelines depending on the option type — one is certain and immediate, the other conditional on the AMT.
How it works
Both option types share the identical spread calculation (FMV minus strike price, times shares). An NSO’s spread is immediate ordinary W-2 income at exercise. An ISO’s spread has no regular tax at exercise but becomes an AMT preference item, which may or may not trigger actual AMT liability depending on the taxpayer’s full AMT picture.
What this does not include
This computes the exercise-year tax picture only — it doesn’t project whether the ISO spread will actually trigger AMT (which depends on total AMT income and other preference items) or model the capital gains treatment on an eventual qualifying ISO sale.
How to use this calculator
- Enter options exercised, strike price, and fair market value at exercise.
Frequently asked questions
Does exercising ISOs always trigger AMT?
No — only if the ISO spread, combined with other AMT preference items and income, pushes total AMT liability above regular tax liability for the year.
What is the ISO holding period requirement?
Selling at least 2 years after grant and 1 year after exercise qualifies the eventual gain for long-term capital gains treatment — selling sooner (a “disqualifying disposition”) converts part of the gain to ordinary income instead.
Why would anyone choose NSOs over ISOs?
ISOs are only available to employees and have annual limits and holding-period requirements; NSOs can be granted to anyone (including consultants and directors) with more flexibility but less favorable tax timing.
