My options are underwater. Can I write them off?

No. An option you never exercised cost you nothing, so there's nothing to deduct when it expires, the same way the IRS won't take your losing lottery tickets. A loss only exists once you've paid the strike: if exercised shares later go to zero, you get a capital loss, which offsets gains in full but only $3,000 a year of salary.

Should I exercise everything the day I join?

If the company allows early exercise and the strike equals the 409A, it's the one move that makes ISOs and NSOs tax-free until you sell: file an 83(b) within 30 days, owe nothing, and start both ISO clocks. The catch is that you're writing a check to a company you've worked at for a morning. Try Early exercise + 83(b) above. Also, the 30 days is a hard deadline. The IRS does not grant extensions, even to founders with very good excuses.

My RSUs vested and my employer withheld taxes. We’re square, right?

Probably not. Employers can withhold a flat 22% federal on stock income (37% above $1 million), whatever your actual bracket. If the vest pushes you into 32% or 35%, the difference arrives in April, along with any state shortfall. Every NSO and RSU column above has a Tax due marker for exactly this.

It was invented in 1969 after the Treasury told Congress that 155 high-income households had paid no income tax. Today it mostly catches people exercising ISOs. The One Big Beautiful Bill Act kept the bigger exemption ($90,100 single, $140,200 joint in 2026) but phases it out twice as fast, starting at $500,000 and $1 million. AMT on ISOs is mostly a prepayment you get back as a credit, unless the company dies, in which case it's a very slow refund.

My friend says ISOs are always better than NSOs.

Your friend has never met the AMT. ISOs win when you can afford to exercise early or hold long enough, and the company works out. They also come with a $100,000-a-year cap, holding periods, and a deadline: exercise more than three months after you leave and they're taxed as NSOs anyway. That's why a company that offers a ten-year exercise window is quietly turning your ISOs into NSOs.

Can I file an 83(b) on my RSUs?

No. An RSU is a promise to give you shares later, not shares, so there's nothing to elect on. (Restricted stock, actual shares that vest, is a different animal and can be 83(b)'d.) Private companies get around the vesting-day tax bill with double-trigger RSUs, which aren't taxed until both the time has passed and the company is sold or public.

What if the acquirer just cashes out my options?

Then you never own the stock: the spread is paid to you as wages, Social Security and Medicare included, whether the options were ISOs or NSOs. The At the sale exercise above models exercising and selling the shares yourself, which spares ISO holders the payroll tax. Read the merger agreement before you celebrate.

ISO vs. NSO vs. RSU · How stock compensation is taxed

How much will your equity be worth? Try Paper Money →

Start from

The grant

Shares Strike price Value at grant (409A) Value at vest Sale price

A sale price of $0 means the company went under.

Timing

Vests Jan 2027 · month 12

Sold Jul 2028 · month 30

Exercise options

At grant + 83(b) At vest At the sale

The whole grant vests on one date, as if at the cliff. RSUs vest on that date whatever you pick here.

You

Salary Filing status State

After every tax, you keep

ISO $381K $179K tax · $74K cash up front

NSO $370K $190K tax · $109K cash up front

RSU $392K $208K tax · $87K cash up front

ISO Incentive stock options

No tax at exercise, unless the AMT says otherwise. Hold long enough and every dollar of profit is a long-term gain.

You keep $381K of $600K in proceeds; 32.1% of the profit went to tax

G Grant Jan 2026 20,000 options at a $2.00 strike. Not taxed.
V Vest Jan 2027 The options become exercisable. Nothing is taxed.
E Exercise: the AMT counts the spread Jan 2027 No regular tax, but the alternative minimum tax adds the $160K spread to your income for the year. You pay $40K.
$ April 2028: tax due Apr 2028 $34K more owed for 2027, $34K of it is AMT.
S Sell: qualifying disposition Jul 2028 Held a year past exercise and two past grant, so all $560K of profit is long-term gain.
$ April 2029: tax due Apr 2029 $146K more owed for 2028, after $28K of AMT credit comes back.

Cash before you can sell

$74K out of your own pocket, before a single share is sold.

Jan 2027 · Exercise cost$40K
Apr 2028 · Tax due, April$34K

Where the money goes

Sale proceeds $600K
Exercise cost −$40K
Federal income tax −$94K
AMT paid −$34K
AMT credit back +$28K
Net investment income tax −$21K
CA tax −$59K
You keep $381K

$5,588 of AMT credit is still owed back to you. On salary alone it returns about $8,160 a year, so roughly 1 more year.

NSO Nonqualified stock options

The spread at exercise is taxed like salary, with payroll tax. Only growth after that is a capital gain.

You keep $370K of $600K in proceeds; 33.9% of the profit went to tax

G Grant Jan 2026 20,000 options at a $2.00 strike. Not taxed.
V Vest Jan 2027 The options become exercisable. Nothing is taxed.
E Exercise: the spread is wages Jan 2027 $160K of W-2 income (the value above the strike). You pay $40K. $39K withheld.
$ April 2028: tax due Apr 2028 $30K more owed for 2027.
S Sell Jul 2028 $600K in proceeds: a $400K long-term gain over your cost basis.
$ April 2029: tax due Apr 2029 $121K more owed for 2028, $3,640 of it is AMT.

Cash before you can sell

$109K out of your own pocket, before a single share is sold.

Jan 2027 · Exercise cost$40K
Jan 2027 · Withholding at exercise$39K
Apr 2028 · Tax due, April$30K

Where the money goes

Sale proceeds $600K
Exercise cost −$40K
Federal income tax −$110K
AMT paid −$3,640
Social Security & Medicare −$3,760
Net investment income tax −$15K
CA tax −$58K
You keep $370K

RSU Restricted stock units

No strike and no exercise. The full value is taxed like salary the day they vest.

You keep $392K of $600K in proceeds; 34.7% of the profit went to tax

G Grant Jan 2026 20,000 RSUs. Nothing to pay, nothing taxed.
V Vest: taxed as wages Jan 2027 $200K of W-2 income at $10.00 a share. $49K withheld (22% federal plus FICA).
$ April 2028: tax due Apr 2028 $38K more owed for 2027.
S Sell Jul 2028 $600K in proceeds: a $400K long-term gain over your cost basis.
$ April 2029: tax due Apr 2029 $121K more owed for 2028, $3,640 of it is AMT.

Cash before you can sell

$87K out of your own pocket, before a single share is sold.

Jan 2027 · Withholding at vest$49K
Apr 2028 · Tax due, April$38K

Where the money goes

Sale proceeds $600K
Federal income tax −$122K
AMT paid −$3,640
Social Security & Medicare −$4,700
Net investment income tax −$15K
CA tax −$62K
You keep $392K

Ordinary income AMT or a loss Long-term gain Cash out the door No tax

The AMT trap

ISOs dodge regular tax at exercise, but the alternative minimum tax doesn’t: it adds the spread to your income and can send you a bill for gains you can’t sell. Here’s your grant in the version of events nobody puts in the offer letter.

1 · Jan 2027 You exercise
You pay $40K for 20,000 shares the 409A says are worth $10.00 each.
2 · April 2028 The AMT bills a paper gain
The $160K spread isn’t income to the regular tax, but the AMT counts it: $34K due, in cash.
3 · Jul 2028 The company goes to zero
The shares are worthless. The AMT you paid on them isn’t refunded.
4 · After The slow way back
You’re out $74K of real cash. The loss offsets $3,000 of salary a year, and the AMT comes back as a credit, but only in years your regular tax runs above the AMT.

AMT credit coming back, by year

From the model Projected on salary alone

All $34K comes back by 2032, as a loan to the IRS at 0% interest.

How people avoid it

Exercise under the AMT line. At your salary, about $31K of spread a year adds no AMT, roughly 3,923 shares at today’s $8.00 spread. Spread exercises across years.
Exercise early, when the spread is zero. With an 83(b) election there’s nothing for the AMT to count. You risk only the strike.
Undo it in the same year. Selling ISO shares in the year you exercised them is a disqualifying disposition: the spread becomes ordinary income and the AMT preference disappears.
Wait for the exit. Exercising the day of the sale costs you the long-term rate, but nothing is ever at risk.

The vocabulary

Spread (bargain element)

What the shares are worth on the day you exercise, minus the strike you pay, times the number of shares. It’s the number every tax on options is built on.

Ordinary income vs. capital gains

Ordinary income (salary, NSO spreads, RSU vests) is taxed at up to 37% federally, plus Social Security and Medicare if it’s wages. Gains on shares held more than a year are long-term and taxed at 0, 15 or 20%. Held a year or less, they’re short-term and taxed like salary, minus the payroll tax.

Alternative minimum tax (AMT)

A second tax calculation with fewer deductions, a big exemption, and flat 26% and 28% rates. You pay whichever is higher. Exercising ISOs and holding them past December 31 adds the spread to the AMT’s version of your income but not the regular one.

AMT credit

AMT caused by ISOs isn’t lost: it becomes a credit against regular tax in later years, usable whenever your regular tax exceeds the AMT. Selling the shares usually creates that gap, because the AMT already counted part of the gain. It never expires, and since 2013 it can’t be refunded early.

Qualifying vs. disqualifying disposition

Sell ISO shares more than a year after exercise and more than two years after grant, and all the profit is long-term gain. Sell sooner and it’s disqualifying: the spread at exercise (or your actual gain, if smaller) becomes ordinary income, without payroll tax, and only the rest is a capital gain.

83(b) election

Exercise before vesting and file this with the IRS within 30 days to be taxed on the shares now, not as they vest. If you paid full value, the tax is zero and the capital gains clock starts. Not available for RSUs.

Supplemental withholding

Bonuses, NSO spreads and RSU vests can be withheld at a flat 22% federal, 37% above $1 million in a year. It’s a down payment, not the bill.

409A valuation

The appraised value of common stock that sets strike prices and the spread at exercise. It’s usually well below what investors paid for preferred, which is what makes early exercise cheap.

Wondering what your shares will be worth in the first place? Paper Money plays a startup from the first SAFE to the exit, liquidation preferences and all.