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Scenario (numbers are for illustrative purposes only): 2017: I exercised options when I left my former employer (startup, not public). Exercised 100% of 10,000 ISOs, common stock. At a strike price of $1 / share. FMV at that time of $4 / share as reported on IRS form 3921.

2017 taxes: Alternative minimum taxes owed, because fair market value was $3/share higher than strike price. Let's say it was $10,000 AMT due.

I did not have enough cash for the tax bill at that time, so I started an installment plan.

2019: Company was acquired for much less than funds raised. Investors took a bath. All common stock shareholders got zero. I'm still paying back the tax installment plan.

2019 taxes: ... what now?

  • Should I expect any tax documents from the company? A 1099-B perhaps?

  • Is there any way to get any tax benefit from the lost $10,000 investment?

  • Is there any way to get any tax benefit from the $10,000 AMT paid in 2017?

  • You might want to list out roughly how much at the time of acquisition percentage of ISO (so probably nothing claimable) and percentage of stock shares you owned (probably a capital loss claimable). Related IRS topic: Topic No. 427 Stock Options. – Morrison Chang Feb 9 at 4:20
  • @MorrisonChang Thanks. By "percentage of stock shares", do you mean percentage of the company? I'm afraid they flatly refused to give me that number. By "percentage of ISO", do you mean what percentage of my options did I exercise? – slinkp Feb 10 at 20:18
  • By percentages I meant the latter (i.e. you exercised 30% into stock with 70% ISO outstanding of your grant/agreement). You may be better off editing your post with appropriate fake numbers for things like AMT Basis. – Morrison Chang Feb 10 at 20:58
  • @MorrisonChang Thanks for the suggestion, I have added some numbers for illustration purposes. – slinkp Feb 11 at 5:31
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All common stock shareholders got zero.

I assume you mean the stock was cancelled (by the company), so you didn't receive any payment and cannot receive any in the future. If you still have any legal right to possibly receive something, it means you haven't yet definitely lost everything, at least for tax purposes.

Should I expect any tax documents from the company? A 1099-B perhaps?

Probably. In the cases where I have held stock that was cancelled, it was always in a broker account (and necessarily listed) and it was included on my 1099-B from the broker. I believe the same obligation applies in this case where you held directly. Assuming of course they have your correct SSN and address, but presumably they needed that for the reporting when you exercised.

Is there any way to get any tax benefit from the lost $10,000 investment?

Very likely. Assuming as above the stock was cancelled in 2019, you have a realized capital loss. List on form 8949 and carry to Schedule D. If you have any capital gains from other transactions it first offsets them. If that leaves a net capital loss, you can deduct up to $3000 from other income; see Schedule D line 21. Reducing your income usually reduces your tax, but the amount varies depending on the totality of your tax situation (which you didn't and probably shouldn't provide) and there are some cases where it does not provide a benefit.

If your net capital loss exceeds the amount you can take this year, the excess is carried forward to next year, where you enter it on Schedule D and it works the same way: first offsetting capital gains, then deducting up to $3000 from other income, and finally being carried forward again, until used up.

Is there any way to get any tax benefit from the $10,000 AMT paid in 2017?

Yes. If you are subject to AMT on 'deferral' items, including ISO exercise, in one year, and not in a subsequent year or years, you can get a credit in the subsequent year(s); see https://turbotax.intuit.com/tax-tips/irs-tax-return/alternative-minimum-tax-common-questions/L50YotKHP#taxcredits . I don't know if you are legally required to take this in the first year(s) available, but all the instructions I see are written for that case, which is obviously what any rational person would choose. So if you didn't do this for 2018 you probably must first amend 2018 to take whatever part you can take then, and if that leaves a carryover apply it to 2019, and if still a carryover remember it for 2020 when that rolls around, etc.

If you used the same software for both 2017 and 2018, or the same preparer, I would expect it or them to have automatically detected and proposed this, and maybe even done it without you noticing if like many you click 'ok' without reading. You might want to check your 2018 return first before doing anything else.

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