Alternative Minimum Tax (AMT)
A parallel tax system that can trigger a large tax bill when you exercise ISOs at a private company.
Definition
The Alternative Minimum Tax is a parallel tax calculation that can create a significant tax liability when exercising incentive stock options (ISOs). Under the regular tax system, exercising ISOs is not a taxable event. Under AMT, the spread between the strike price and fair market value at exercise is a tax preference item. If the AMT calculation exceeds your regular tax, you owe the higher AMT amount. The AMT paid can be recovered as a credit in future years.
Why it matters
AMT is the biggest tax trap for startup employees exercising ISOs. You can owe tens of thousands in taxes on paper gains for shares you cannot sell. Many employees have been financially devastated by AMT on shares that later became worthless. Always model AMT exposure before exercising.
Example
You exercise 20,000 ISOs at a $2 strike when FMV is $20. The $360K spread is an AMT preference item. AMT could be $80K+, due immediately, even though you cannot sell the shares. If the company fails, you paid $80K in tax on worthless stock. The AMT credit may take years to recover.