Private-Company Stock Options Can Trigger AMT Before Shares Are Sellable
A private-company employee plans to exercise incentive stock options by paying $20,000 for shares worth $220,000, creating a $200,000 paper gain. If she still holds the shares after December 31, the spread becomes an alternative minimum tax adjustment, producing a tax bill even though she has not sold any stock. Because private-company restrictions may block a sale, she is advised to run a full projected tax return before exercising.
An employee exercising incentive stock options at a private company could pay $20,000 for shares valued at $220,000, creating a $200,000 paper gain. If the shares are sold in the same calendar year as exercise, the IRS generally does not require an AMT adjustment. Holding them into the next year can turn that spread into an AMT income adjustment.
The resulting tax depends on total income, deductions, filing status, exemptions, and regular tax. For 2026, a single filer’s AMT exemption is $90,100, phasing out at $500,000. Private-company liquidity limits, such as transfer restrictions or narrow tender windows, may prevent selling shares to cover tax. Any AMT paid may later generate a minimum-tax credit.
Private-company employees with equity compensation could be most affected, since they may owe tax after exercising options even when shares cannot be sold. That may strain personal cash flow and make secondary-market access more important. It could also influence how workers weigh startup offers and how employers explain option risks, while encouraging earlier tax projections before exercise decisions.