ISO exercise cost calculator
Add up the strike price and the AMT so you know the full cash cost of exercising your ISOs, not just the sticker price.
ISOs · Forms & reporting
What does it really cost to exercise your incentive stock options? Way more than the strike price most people budget for. Exercising has two bills, and the second one is the one that wrecks plans. There is the cash to buy the shares, and there is the alternative minimum tax (a parallel tax that counts the gain regular tax ignores). Add both, or you will under-fund the exercise and get caught.
The two costs, added together
The strike cost
Shares times your strike price. This is the cash you hand the company to turn options into shares. Exercise 10,000 options at a $2 strike and you owe $20,000 right there.
The AMT cost
The bargain element (share value at exercise minus strike) can trigger the alternative minimum tax. On 10,000 shares worth $12 with a $2 strike, that spread is $100,000, and depending on your other income it can produce a real AMT bill. Estimate it with the ISO AMT estimator.
Add them
Strike cost plus estimated AMT is your true cash outlay. The shares cost $20,000 to buy, but if the spread drives, say, a five-figure AMT, your actual check is much larger. Budget the sum, not the strike.
The number people miss
Almost everyone budgets the strike price and forgets the AMT. Then the tax bill lands the following April for a sum they never set aside. The strike is the part the company shows you. The AMT is the part the IRS shows you later. Both are due.
The hidden cost that is not on the invoice
Here is the second-order price. Every dollar you spend exercising is a dollar locked into one company’s stock, often stock you cannot sell. With private, pre-IPO shares, you pay the strike and possibly the AMT in cash, and in return you hold something with no market. If the company stumbles, that cash is gone and the shares are worth nothing.
I do not like trading liquid cash for an illiquid, concentrated bet. Sometimes the upside justifies it. Often it does not. The calculator tells you the size of the check. It cannot tell you whether the bet is smart, and the bet is the real decision.
Some of the AMT comes back
The AMT portion of your cost is not all permanent. Much of it returns later as the AMT credit, recovered in years your regular tax exceeds your AMT. So the strike is sunk into the shares, but the AMT is more like a deposit. Plan the cash for both anyway, because the credit can take years to come back.
What about a cashless exercise to avoid the cash crunch?
A cashless exercise sells some shares to cover the strike and tax, so you write a smaller check or none at all. The catch is it can blow the ISO holding period and turn your gain into ordinary income. Convenience has a tax price. Weigh it before you default to it.
Should I exercise early in the year?
Exercising early in the calendar year gives you until December to watch the stock. If it craters, you can sell before year-end and undo the AMT exposure on shares you no longer hold. Exercise in December and you lose that escape hatch. Timing is free risk reduction.
Run the full sum before you fund the exercise. The strike is the easy half. The AMT is the half that decides whether you can actually afford this. When the check is large and the shares are illiquid, that is exactly the moment to talk it through before you wire the money.
More in ISOs
Still have questions about your equity?
Join the community to ask directly, or take the two-minute fit check to see if a planning call makes sense.