How stock options are taxed depends on what type of equity you hold and when you act on it. ISOs aren't taxed under regular rules at exercise, but the spread can trigger the Alternative Minimum Tax (AMT). NSOs are taxed as ordinary income on the spread at exercise. RSUs are taxed as income when they settle. When you sell, any additional gain is taxed as short- or long-term capital gains.

Below: what you owe at every stage, how each equity type is taxed with worked examples, how the AMT exemption works in 2026, and 17 ways to pay less.

Stock Option Taxes at Every Stage: Grant, Vest, Exercise & Sale

How ISOs Are Taxed

When you exercise ISOs, you don't owe regular income tax. Instead, the spread (the 409A fair market value minus your strike price) is added to your AMT income. If it's large enough, you owe AMT for that year, even though you haven't sold anything.

Example: You exercise 1,000 ISOs at a $10 strike price when the 409A value is $50. That $40,000 spread goes into your AMT calculation. Run your numbers in the AMT calculator before you exercise.

Qualifying vs. disqualifying sale. If you hold the shares at least one year after exercise and two years after grant, the entire gain from your strike price to your sale price is taxed at long-term capital gains rates. Sell those 1,000 shares at $100 and the $90,000 gain is long-term capital gains. Sell earlier and it's a disqualifying disposition: the spread at exercise is taxed as ordinary income, and only the gain above that is capital gains.

AMT isn't always lost. AMT paid on an ISO exercise generally creates a credit you can recover in future years when your regular tax exceeds your AMT. See our guide to the AMT credit.

The 2026 AMT Exemption and Phaseout

For 2026, the AMT exemption and phaseout work like this:

• Exemption: $90,100 for single filers and $140,200 for married couples filing jointly.
• Phaseout starts: at $500,000 of AMT income for single filers and $1,000,000 for joint filers.
• Phaseout speed: the exemption shrinks by 50 cents for every dollar above the threshold.

A large ISO exercise can push your AMT income past the threshold and wipe out much of the exemption in a single year. That's why spreading exercises across tax years (strategies 3 and 7 below) matters. The exemption amounts adjust for inflation each year; see our One Big Beautiful Bill guide for the background.

How NSOs Are Taxed

NSOs are taxed as ordinary income on the spread at exercise, reported on your W-2, plus Social Security and Medicare taxes. Your employer withholds at exercise, so that cash is due upfront on top of the exercise cost.

Example: You exercise 1,000 NSOs at $10 when the 409A value is $50. The $40,000 spread is taxed as ordinary income, at up to 37% federal in the top bracket, plus state tax. If you later sell at $100, the additional $50,000 gain is taxed as capital gains: long-term if you held more than one year after exercise, short-term if not.

One caution: employer withholding on NSOs is often a flat supplemental rate that can fall short of your actual bracket, so you may owe more when you file.

How RSUs Are Taxed

Restricted Stock Units aren't options and don't require exercise (see RSUs vs. stock options). They're taxed as ordinary income on the value of the shares when they settle. At most private companies, RSUs are double-trigger: they vest over time, but settle only at an IPO or acquisition. That's when the tax hits, based on the fair market value at that time, even if you don't sell. Any gain after settlement is taxed as capital gains when you sell.

Stock Option Tax Rates

• Federal ordinary income: 10% to 37% (NSO spread, disqualifying ISO sales, RSU settlement, short-term gains)
• Long-term capital gains: 0%, 15%, or 20%
• Net Investment Income Tax: an additional 3.8% on investment gains for higher earners
• AMT: 26% or 28% on AMT income above the exemption (ISO spread)
• Payroll taxes: Social Security and Medicare apply to NSO spread and RSU income

State Taxes

State taxes stack on top. California's top rate is 13.3%, while states like Texas and Washington have no income tax. NSO spread is taxed as income by most states at exercise. ISOs generally avoid state tax at exercise, except in states with their own AMT, like California. Some states can also tax income tied to work you did while living there, even after you move. See exercising stock options in California and New York.

Stock Option Tax Forms

• Form 3921: sent by your employer after an ISO exercise, with the strike price and FMV you need to calculate AMT.
• W-2: includes NSO exercise income and RSU settlement income.
• Form 6251: where AMT is calculated on your return.
• Form 8801: where you claim the AMT credit in later years.
• Form 1099-B: reports the sale of shares. Check that your cost basis includes any income already taxed at exercise, or you'll pay tax twice.
• 83(b) election (Form 15620): filed within 30 days of an early exercise.

17 Ways to Reduce Stock Option Taxes

There are legitimate, IRS-recognized ways to reduce, defer, or better time your stock option taxes. Some apply only to ISOs, some only to NSOs, and several work for either. Each links to a deeper guide.

Where to Start: The 5 Most Common Strategies

1. Exercise early and file an 83(b) election. Buying shares while the company's value is low can shrink the taxable spread and start your long-term capital gains clock sooner. You generally must file the 83(b) within 30 days of early exercise.
2. Exercise and hold for long-term capital gains. Holding shares long enough shifts the gain to long-term capital gains rates, which are lower than ordinary income rates.
3. Exercise just enough options each year to avoid AMT. Because AMT is calculated annually, ISO holders can exercise only as much as keeps them under the AMT threshold each year, starting the holding period without a large one-year bill.
4. Exercise ISOs in January to maximize your float. AMT isn't due until you file the following spring, so a January exercise gives you the most time before payment. The tradeoff: waiting could coincide with a higher 409A.
5. Recover AMT through the AMT credit. AMT paid on ISO exercises can often be recovered in later years when your regular tax exceeds your AMT, claimed on Form 8801.

ISO-Specific AMT Management

6. Reduce AMT on ISOs by exercising NSOs. NSO income raises your regular tax, which narrows the gap between regular tax and AMT, so more ISO spread can fit in the same year without triggering AMT.
7. Split ISO exercises between December and January. Exercising across two tax years a few weeks apart lets you use two years of AMT headroom at nearly the same 409A price.
8. Use an AMT disqualifying disposition. Selling ISO shares in the same calendar year you exercised them converts the spread to ordinary income and eliminates the AMT adjustment for that year. Useful if the stock has dropped since exercise.

IRS Elections & Exercise Mechanics

9. File an 83(i) election to defer NSO taxes for up to 5 years. If your company's plan qualifies, eligible employees can defer income tax on NSO exercises or RSU settlement while the company is private.
10. Exercise options in a Qualified Small Business. Shares in a qualifying C-corp held long enough may exclude some or all of the gain from federal tax. The holding period starts at exercise, not grant.
11. Execute a swap exercise. Use shares you already own to pay the exercise price instead of cash.

Exit, Capital Gains & Tax Arbitrage Strategies

12. Move stock to an Individual Retirement Account (IRA). In limited cases, buying private stock through a self-directed IRA can shelter future gains. The rules are strict, so work with a specialist.
13. Roll capital gains into an Opportunity Zone fund. Reinvesting gains in a Qualified Opportunity Fund can defer tax on the original gain and potentially exclude gains on the new investment.
14. Defer capital gains tax via a deferred sale trust. An installment-style structure spreads recognition of a large gain over several years.
15. Reduce NSO exercise taxes through a charitable conservation easement. A qualifying easement donation can create a deduction to offset NSO income. The IRS scrutinizes syndicated easements closely, so use only with qualified advisors.
16. Minimize Medicare taxes by investing before an exit. How and when you hold shares before an exit can affect how much Medicare surtax and Net Investment Income Tax applies to your gains.
17. Move to a lower state tax jurisdiction. Establishing residency in a no- or low-income-tax state before you exercise or sell can cut your state bill. Your former state may still tax income tied to work done there.

Common Stock Option Tax Mistakes

• Overlooking cash needs. Exercising NSOs requires cash for the exercise price and the withheld taxes upfront, and withholding may not cover your full bill.
• Misjudging AMT. ISOs can look tax-free at exercise, but a wide spread can trigger an AMT bill you didn't see coming, due the following April. Missing it means penalties on top.
• Double-counting basis. If your 1099-B cost basis leaves out income already taxed at exercise, you'll pay tax on the same dollars twice.
• Forgetting deadlines. Options expire, often 90 days after you leave a company. Know your expiration date before you plan anything else.

How to Pay Your Stock Option Tax Bill Without Cash

Most of the strategies above assume you have cash to exercise and cover the tax. If you don't, ESO Fund can help. Exercise your stock options and cover the taxes with no interest, no out-of-pocket cost, and no personal risk if the company fails. Your shares, your upside.

ESO Fund has funded employees at 700+ venture-backed companies since 2012, and AMT and NSO taxes are covered as part of the funding, not an add-on. Estimate your exposure with the AMT calculator, then see if you qualify.

This guide is for educational purposes and isn't tax advice. Talk to a tax professional about your situation.

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Written by Jordan Long, CMO at ESO Fund