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Incentive Stock Option – ISO Calculator

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PK

On this page is an Incentive Stock Options or ISO calculator. Input details about your options grant and tax rates, and the tool will estimate your total cost to exercise your grant and your net proceeds. It can also show your worst-case AMT owed upfront, total tax and its breakdown, and the allocation of income depending on your exercise strategy.

Incentive Stock Option Calculator

Using the ISO Calculator

In the United States, incentive stock options are stock options with special tax treatment only granted to employees of a company. At exercise, you'll owe no regular taxes. However, the bargain element of the options – the difference between the exercise fair market value and the strike price – counts as income for purposes of the Alternative Minimum Tax.

Incentive Stock Option Inputs

You'll need to gather some inputs (or make some estimates) to get the most out of the tool. If you've already sold, most of these values are likely on the Form 3921 issued by your employer.

Stock Option Data

  • Number of options: how many shares you were granted the option to purchase
  • Options strike price: the strike price of your options grant
  • Exercise FMV or Assessment/409A: market price at exercise or the price per share from an independent assessment (generally on the 409A)
  • Sale Price: the price to sell the exercised shares

Tax Rate Data

  • Marginal Tax Rate (%): your tax rate on income at the margin, including Federal, State, or Local taxes (payroll tax as well, if applicable)
  • Alternative Minimum Tax Rate (%): your estimated AMT rate (check the instructions for Form 6521 to estimate where you will end up). Be sure to include any state and local AMT as well
  • Short Term Capital Gains Tax Rate (%): your marginal tax rate (including any state and local addition) on investments held for less than a year
  • Long Term Capital Gains Tax Rate (%): your marginal tax rate (including any state and local addition) on investments held for more than a year

Incentive Stock Options Tool Outputs

There are two views possible in the tool, a basic view, and an advanced view. For both views, three columns show results for 3 exercise and selling strategies, marked by "Held Grant | Exercise to Sale":

  • Any | Under 12 Months - If you don't hold your shares for more than 365 days after exercise, you'll only have income and short-term capital gains or losses. 
  • < 24 months | > 12 Months - If you hold your shares for more than 365 days after exercise, any gain between the market value at exercise and your selling price is a long-term capital gain. The bargain element is regular income.
  • > 24 Months | > 12 Months - If you hold your shares for more than 2 years after your grant date and more than 1 year after your exercise, you meet the holding period requirements where all of your bargain element and any appreciation since exercise counts as capital gains.

Double-check your strategy against the IRS's Stock Options overview page and Publication 525TurboTax also gives a nice overview of the strategies.

Simple Calculation

After entering your options grant details and assumptions, click the "Compute ISO Return and Tax" button for a basic overview.

  • Exercise Cost (with worst case AMT) ($)
    • outside parentheses: the exercise cost of your options, ex-any AMT 
    • in parentheses: the exercise cost plus any AMT you'll owe, assuming every dollar of the bargain element will factor into your AMT
  • Total Tax ($): The amount of tax you'll pay, between income taxes and capital gains. This field does not include any AMT paid at exercise; see the IRS's guide to Form 8801 for details on credits for past AMT
  • Net ($): The total amount in your account when you sell the shares under your chosen strategy. (Note: it also includes the cost basis of your exercised shares; to compute the gain back out the exercise cost.)

Advanced Calculation

If you select "Compute & Show Breakdown", you'll find the advanced view in the tool.

  • Everything from the Simple Calculation is included, plus
  • Bargain Element/AMTi: the difference between the strike price and the exercise price). This would go into the AMTi field labeled "Exercise of incentive stock options" on Form 6521 if you don't sell in the same year (in that case, only income is relevant)
  • Ordinary Income: either the bargain element or the difference between the exercise price and sale price – whichever is lower
  • Capital Gains: the sum total of short-term and long-term capital gains for the strategy
  • Income Tax (No AMT Adj): regular income taxes owed (that is, not including AMT from exercise) for a given strategy 
  • Capital Gains Tax: the total amount of short and long term capital gains taxes owed for the given strategy
  • Gross at Sale: amount in your brokerage account at sale before you have to pay any taxes

ISO Tool Disclaimer

As with other tools, note that none of this is investment or tax adviceThis tool is for planning and information only, and you should confirm any numbers in a spreadsheet or with a professional. Also, verify all data against the IRS forms and instructions linked above, and note that tax laws are fluid, and I may not update this tool for all scenarios.

Also, this tool assumes you'll have to pay Alternative Minimum Tax from the first dollar of bargain element – a worst-case scenario. That probably isn't your case. Erik Barbara's excellent ISO exercise AMT planning tool can help you decide how many options to exercise while avoiding paying anything additional in AMT.

Incentive Stock Options: Awesome, but Not Tax-Free to Exercise

ISOs are a great employee perk, especially if you don't sell until more than two years after your grant and more than one year after you exercise. In that case, any gains on top of your strike price are considered capital gains – huge savings over your income tax rate. And while the upfront AMT owed can be a drag, you should get most of those taxes back eventually due to credits for prior year AMT.

Often, exercising early is the best option if you can swing it... assuming, of course, your company continues to grow in value! SecFI details some of the catches (and real-life examples) of ISOs and exercise strategies in their great ISO guide.

Hopefully, this tool helped you estimate the potential impact of taxes on your ISOs under various holding and selling scenarios. The impact of the AMT makes this a trickier calculation than for most other employer incentive programs... or Non-qualified Stock Options (NSOs) for that matter.

Still, ISOs are an amazing perk (especially after you understand their tax implications!)

Other benefit and retirement calculators:

Don't Quit Your Day Job...

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