Tax treatment
AMT and ISO Exercise Interacting with a Secondary Sale
Selling ISO-exercised shares before the holding period is met can undo favorable tax treatment.
What it is
Incentive stock options (ISOs), once exercised and held, can trigger Alternative Minimum Tax in the exercise year — a separate tax event from any later sale. If you're now selling those shares secondary, the sale's timing relative to the ISO holding-period rules matters a great deal.
Why it matters for a secondary
Selling ISO-exercised shares before both required holding periods are met — 2 years from grant and 1 year from exercise — is a "disqualifying disposition," which converts part of what would have been favorable long-term capital gain into ordinary income. A buyer purchasing such shares isn't affected by the seller's AMT history, but the seller needs to check this before agreeing to any secondary sale timeline.
Quick facts
- ISO qualifying holding period
- 2 years from grant AND 1 year from exercise — both required
- Selling before that window
- Disqualifying disposition — part of the gain becomes ordinary income
- Prior AMT paid on exercise
- May become a usable credit in the year of a qualifying sale — confirm with a tax advisor
Common mistake: Agreeing to a secondary sale timeline without first checking ISO holding-period status, unnecessarily converting favorable capital gain into ordinary income.