You have two sets of cost basis on your ISOs
When you started working for your company, you might have been excited, intrigued, and maybe even a little confused when your compensation package included Incentive Stock Options (ISOs). Let’s start with a quick refresher on what ISOs are. They are options given to you by your employer as part of your total compensation package. As the holder of the option, you vest over time, making the options exercisable. This means you can buy your employer’s stock for a pre-determined price, known as the strike or exercise price.
You might already be very versed in the concept of cost basis…it’s basically the starting line to determine profit or loss. If you buy a stock, mutual fund, or ETF, it’s how much of YOUR money is in the position. There are some situations, such as wash sales, where calculating your cost basis can get wanky, but we are not going to get into that today.
When you hold shares acquired via ISO exercise, you have two sets of cost basis:
Regular Tax Basis- This is the cost basis we all think of, it’s the amount you paid for the stock. This is your strike price.
AMT Basis- Take the regular tax basis and add the bargain element (market price at purchase minus strike price). This will make the AMT basis higher than the regular tax basis. Having a high AMT basis can help offset or eliminate the AMT gain on sale later on.
Example:
In March 2022, a Senior JPMorgan executive exercised ISOs on March 25, 2022.
> $99.76 strike price on the ISOs (closing price for March 24, 2019).
>They used the ISO to buy 63,504 shares of JPM.
>Sold 38,864 shares on the same day for $141.99 each (prevailing fair market value), totaling $5,518,299.36
This would give them a regular tax basis of $6,335,159.04 or $99.76/share. The AMT basis would be $141.99 per share as the bargin element is added back to the strike price, effectively making the AMT basis the same as the fair market value of the shares at exercise.
I would love to show a verified example, the only way to verify it would be to get a hold of Form 3921, which will only be given to the employee who did the ISO exercise….so examples found from public documents (with an assumption or two sprinkled in) will have to do.
Sources JPM From 4 dated March 25, 2022
