We will now describe three different strategies. Think about which one aligns best with your interests:
Fully Qualified Sale
- Exercise all your vested shares as soon as they vest and then hold them at least one year when you can make a qualified sale
- Pro: this strategy ensure you'll only pay long-term capital gains tax
- Con: you may be subject to a surprise AMT tax obligation
Fully disqualified Sale
- Exercise and then sell all your shares within a year of exercising them
- This assumes that there is a market in which you can immediately sell your shares after exercising them (perhaps your company is now public)
- Pro: mitigates the risk that the share price could go down after you exercise your options
- Con: you do not reap the benefit of long-term capital gains tax from the ISO and instead pay ordinary income tax
A Hybrid Solution: partially qualified sale with no AMT obligation
- Each year, exercise as many shares as possible until you hit the AMT cross-over point. Then, wait at least one year before selling exercised shares
- Pro: you'll never have the rude AMT surprise where you owe a large amount of extra taxes
- Pro: you'll take advantage of the long-term capital gains benefits of ISOs
- Con: you may miss out on some possible profit, because you will likely defer the exercising of some (but not all) of your vested ISO stock options