Incentive Stock Option and AMT (2023 Update)

Lock-Up Period on stocks that were acquired through exercised of ISO on a small start up company makes those stocks not transferable (sell-able). The employee does not have full right of "ownership". In some instances the Administrator has to approve and the new owner will be faced with the same restriction. According to Publication 525, Pages 12 and 14, there should be no tax, including Alternative Minimum Tax. However, Form 3921 and its instruction does not make this distinction and trigger AMT even the stocks are not transferable. It treats all the ISOs as if they are stocks of a large public company that is traded on stock market. IRS must make this distinction (ability to sell/transfer) before the AMT is triggered on ISO. Even though there is Fair Market Value box, but there is no "free market of buyers and sellers" and the FMV goes under question, so does the trigger of AMT?

Incentive stock options (ISOs) are a type of employee stock option that can provide certain tax benefits when the options are exercised, such as avoiding the alternative minimum tax (AMT). However, in some cases, the rules for ISOs can be complex and may depend on the specific facts and circumstances of the situation.

According to Publication 525, ISOs are not subject to tax at the time of exercise, as long as certain requirements are met, such as holding the shares for at least one year after the exercise date and two years after the grant date. However, if the shares are not transferable, the employee does not have full right of "ownership" and the fair market value of the shares goes under question.

Form 3921 is used to report the exercise of an ISO and its instructions state that the fair market value of the shares is the value at the time of exercise. However, in cases where the shares are not transferable and the fair market value is under question, it may be possible to make an argument that the ISO should not be subject to the AMT.

It's important to note that the tax laws are complex and the tax treatment of ISOs can depend on the specific facts and circumstances of each case. In this case, it is recommended that you consult with a professional tax advisor to help you navigate the rules and regulations, and to understand the tax implications of your situation. Additionally, It may also be worth reaching out to the IRS for clarification on this matter