ISO vs NSO Exercise Calculator
No tax now, or tax now — and the AMT trap either way
ISO vs NSO Exercise Calculator
shares
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$
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Bargain element (spread)
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(FMV minus strike) × shares
NSO: ordinary income tax due at exercise
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taxed as W-2 wages, immediately
ISO: potential AMT exposure
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no regular tax now, but an AMT preference item
NSOs: taxed now, no surprises later
Exercising a non-qualified option triggers ordinary income tax (plus payroll tax) on the full spread immediately, added to your W-2 — straightforward, but the cash tax bill arrives right when you exercise, not when you eventually sell.
ISOs: no regular tax now, but watch the AMT trap
Incentive stock options avoid ordinary income tax at exercise, but the spread is a preference item for the Alternative Minimum Tax — a large exercise in a low-income year can still trigger a real AMT bill, paid in cash for stock you haven't sold.
The qualifying-disposition payoff
Hold ISO shares more than 1 year from exercise AND 2 years from grant, and the entire gain at sale qualifies for long-term capital gains rates instead of ordinary income — the reason people accept AMT risk to hold ISOs rather than exercise-and-sell same-day.
NSO tax is modeled as the spread taxed at your ordinary rate (actual withholding may differ; Medicare/Social Security payroll tax on the spread isn't separately broken out here). ISO AMT exposure is a simplified estimate (spread × your estimated AMT rate) — your ACTUAL AMT liability depends on your full AMT return (AMT exemption phase-out, other preference items, and whether your regular tax already exceeds tentative AMT) and can be materially different from this simplified number. Get a real AMT projection from a tax professional before a large ISO exercise. Not tax advice.