I'm unsurprisingly confused:

If I exercise ISOs in Jan 2017 and sell them in Feb 2018, how is income reported for AMT purposes and profit reported for cap gain purposes -- are BOTH reported on my 2017 return, even if the shares were sold in 2018 (but before April 15)?

Or, must I report for AMT purposes in 2017, and on my 2018 return, will I report some kind of adjustment due to the fact that the shares were sold at a different FMV than when they were exercised?

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    So, you've got some options to buy Company X at $15, in Jan 2017 you exercise them when Company X is trading at $20. Then you sell them Feb 2018 for $25. You want to know how you report the gain in Jan 2017 and then the second gain in Feb 2018? – Joe Sep 1 '17 at 17:27
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    What country? We have tags. – Chris W. Rea Sep 2 '17 at 2:37

Let's assume it's 1000 shares with a strike price of $11, value during exercise of $15 and sell price of $20.

In 2017 you report the difference between exercise and strike price as AMT income. $4000 in this case.

In 2018 you report the difference between exercise and sell price as long term capital tax income ($9000) for regular tax AND you report the difference between sell price and exercise price as AMT long term capital gain ($5000)

This scenario often leads to double taxation of the difference between exercise and strike price: you pay AMT on it in the year you exercise and regular tax on it in the year you sell.

The IRS has mechanism to potentially compensate for that double taxation: AMT Credit. It's stupidly complicated and depends highly on your specific details, so you may or may not be able to recoup some of the AMT paid in 2017.

Most people in this situation will seek professional help.

EDIT Adding a quick overview on how this all works.

  1. Transactions can create taxable income
  2. There are three types of taxable income: compensation income, short term capital gain, long term capital gain. Tax treatment of those types is sometimes quite different on the state level than it is at the federal level.
  3. There are three types of transactions that are considered differently: exercise, selling in less then one a year (after exercising) and selling after more than a year.

Here is the taxable income that each combination generates

                   Regular                  AMT
Exercise           nothing                  Comp (ex-strike)

Sell < year        Comp (ex-strike)         Short TCG (sell-ex)
                   Short TCG (sell-ex)     

Sell > year        Long TCG (sell-strike)   Long TCG (sell-ex)

That's actually the easy part. The tax calculation itself is a horrible convoluted mess with multi-year dependencies and gets even worse if you have significant state tax component in there.

  • Thanks. Do you have a reference for the AMT tax on long term cap gains? That is news to me. – GottaAsk Sep 2 '17 at 19:30
  • amazon.com/Consider-Your-Options-Equity-Compensation/dp/… is great for this type of thing (no commercial endorsement intended, it's just a super useful book). Long term capital gains are taxed pretty much the same way for regular and AMT but as you can see in the example above, the amount that gets taxed is computed differently – Hilmar Sep 3 '17 at 12:03

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