Exercise Your ISOs Before Year-End, or Wait? The 2026 AMT Decision

Depends on where your 2026 exercise lands against the AMT line. The bargain element on ISOs you hold is an AMT preference item, so the year you exercise is the whole decision. Exercise under the 2026 AMT exemption ($90,100 single, $140,200 married filing jointly, per IRS Rev. Proc. 2025-32) and you may owe no AMT at all.

Why the calendar year is the entire decision

Exercising an ISO and holding the shares creates no regular taxable income. The spread between your strike and the fair market value on the exercise date, the bargain element, instead gets added back as an adjustment when you figure alternative minimum tax. The IRS puts it plainly in Topic No. 427, Stock options: “However, you may be subject to alternative minimum tax in the year you exercise an ISO.”

That one line is why timing is the game. The preference item lands in the tax year of the exercise date, not the year you were granted the options and not the year you eventually sell. Move the exercise across the December 31 boundary and you move the entire bargain element into a different year’s AMT calculation.

For the step-by-step of how that add-back turns into an actual AMT bill, I wrote that up separately in how the AMT actually gets triggered on a biotech ISO exercise. This post assumes you already know the mechanism and are deciding on the calendar.

Where the 2026 AMT crossover point sits

You get an AMT exemption before the alternative tax applies. For 2026 it is $90,100 for single filers and $140,200 for married filing jointly (IRS Rev. Proc. 2025-32, 2025). The exemption itself starts phasing out once alternative minimum taxable income passes $500,000 single or $1,000,000 married filing jointly (same source), which matters for high earners whose salary alone is already large.

Above the exemption, AMT runs 26% on the first slice and 28% once alternative minimum taxable income clears $244,500 for 2026 (IRS Rev. Proc. 2025-32, 2025). Keep in mind your regular tax is running alongside, with the 35% bracket starting at $256,225 and 37% at $640,600 for single filers (same source). You pay the higher of the two systems, so the question is never “do I owe AMT” in the abstract, it is “does this exercise push my AMT above the regular tax I already owe.”

The crossover is the exercise size at which another block of bargain element starts costing you AMT on top of your regular bill. Below it, exercising is close to free of federal AMT. Above it, every additional share exercised and held carries a tax cost you will not recover until you sell and claim the AMT credit, which can take years. Where your personal crossover sits depends on your wages, deductions, and filing status, and that is a number your CPA should run on your actual return, not one I can set from here.

Exercise in 2026 vs. wait to 2027

The case for exercising before December 31

First, you start the two clocks now. A qualifying disposition needs you to hold more than two years from grant and more than one year from exercise (IRS Publication 525). Every month you wait to exercise is a month later you reach long-term capital gain treatment on the sale.

Second, exercising early in a year, including now, buys you decision room. Once the shares are exercised and held, you have until December 31 to watch the stock and decide whether to keep holding or sell inside the same calendar year. A same-year sale is a disqualifying disposition, which drops the bargain element out of your AMT entirely and taxes it as ordinary income instead. That is sometimes the cheaper outcome, and exercising early is what gives you the full runway to make that call with real information.

The price of admission is real. You are putting up the strike price on a stock that may be illiquid, and if it is a pre-IPO or thinly traded biotech, you could be prepaying AMT on paper value you cannot sell to cover the tax. If the shares then decline, you have paid tax on a spread that no longer exists. That is the scenario that hits you hard in taxes with nothing liquid to show for it.

The case for waiting until January

Waiting keeps the 2026 bargain element off this year’s return. If you have already exercised a lot in 2026, or had a large bonus or other income this year, a January exercise drops the next block into a fresh AMT calculation against a new year’s exemption rather than stacking on top of a year that is already tight.

Waiting also keeps your cash and preserves optionality. You are not committing the strike price or any AMT prepayment until you choose to, and if the company’s situation or the share price changes, you are not locked in.

The cost is the mirror image of the first case. Your strike does not change, but the fair market value can, and if it rises, the bargain element you eventually recognize is larger, which means more AMT. You also push the long-term-gain clock out a full year, and you carry the risk that the option expires or your employment ends before you act. Neither side is free. One prepays tax to start the clock, the other defers tax and keeps the clock stopped.

Splitting the exercise across two tax years

There is a third path that is not really a tie-breaker so much as its own strategy. If one full exercise would blow past your AMT crossover, exercising part of the lot in December 2026 and the rest in January 2027 lets each piece draw on its own year’s exemption.

The logic: exercise up to your 2026 crossover before year-end, stop, then exercise the next tranche in January so it lands against 2027’s separate exemption and thresholds. Done right, you can keep both years under the AMT line and owe little or no AMT on a position that would have triggered it in a single year.

It is not automatic. It only helps if your crossover leaves meaningful room in each year, it ties up the strike-price cash across two exercises, and it needs the 2027 inflation-adjusted figures once the IRS publishes them. I can speak to the structure. The exact tranche sizes belong on a projection of your return. If you want to walk your own numbers in a complimentary review before you pull the trigger, that is a reasonable thing to do before December.

How close is your projected 2026 income to the AMT phase-out threshold already?

If I exercise and hold, when do I actually pay the AMT?

With your federal return for that tax year. Exercise and hold in 2026 and any AMT shows up on the return due April 2027. The bargain element is figured on Form 6251 using the exercise-date values your employer reports on Form 3921 (IRS Topic No. 427). The cash is real and due even though you have not sold a share.

Does exercising an ISO create regular income I owe tax on right away?

No. Exercising an ISO and holding the shares produces no regular taxable income. The spread is an AMT adjustment only, per IRS Topic No. 427. Regular income appears later, when you sell, and whether it is capital gain or ordinary income depends on whether you met the holding period (more than two years from grant, more than one year from exercise, IRS Publication 525).

Can I avoid the AMT preference by selling the same year I exercise?

Selling in the same calendar year you exercise is a disqualifying disposition, which removes the bargain element from your AMT and taxes it as ordinary income instead. Sometimes that is cheaper, sometimes not. It depends on your bracket and the spread, which is a per-return calculation rather than a rule of thumb.

Why not just wait until after an IPO or liquidity event?

That is a fair instinct, because selling into a liquid market solves the cash problem. The catch is that an exercise after a big run-up carries a much larger bargain element and a much larger AMT hit, and you still have not started the one-year clock for long-term treatment. The hold-or-wait math changes a lot once there is a market for the shares, so it is worth running both the pre-event and post-event versions.