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2026 tax year · equity compensation

Incentive Stock Options tax

Incentive stock options cost nothing in regular tax when you exercise. They can still generate a tax bill through the alternative minimum tax, on a paper gain you have not realized and may never realize.

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Updated for 2026 rules

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Two taxable events, not one Equity compensation creates two taxable events: (1) ordinary income when shares vest or options are exercised, (2) capital gain/loss when shares are sold. Misunderstanding this two-layer structure is the most expensive equity tax mistake.

Why an exercise you never sold can still cost you

Exercising an ISO costs nothing in regular tax. It does create an AMT preference item: FMV at exercise minus strike price = AMT preference item. For 2026 the AMT exemption is $90,100 single and $140,200 married filing jointly, phasing out from $500,000 and $1,000,000 respectively. AMT runs at 26% and 28% above $244,500.

The trap: Large ISO exercise in single year can trigger AMT even without selling shares. Strategy: exercise in tranches across multiple years to stay below AMT exemption phaseout.

Compare the instruments

The other equity instruments

RSU tax The equity mistake that costs the most: under-withholding at vest. NSO tax The equity mistake that costs the most: tax due on exercise with no cash to pay it. ESPP tax The equity mistake that costs the most: selling one day too early. QSBS tax The equity mistake that costs the most: assuming five years when the rules just changed. Phantom stock & SARs tax The equity mistake that costs the most: expecting capital-gains treatment on a cash bonus.

Equity is two taxable events, not one

Vesting or exercising is ordinary income; selling later is a capital gain or loss. The costliest equity mistakes come from treating that two-layer structure as one: underestimating the vesting-day bill, or missing a holding period that would have turned ordinary income into a lower capital-gains rate. Work out both layers before the vest, not at filing.

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