Exercising $100k of Stock for $0 in Tax

This is the forensic breakdown of how Alena, a Senior Engineer at Databricks, transformed a potential $45,000 tax disaster into a masterclass in wealth preservation.

Alena joined Databricks during a period of hyper-growth. As an early-to-mid-stage hire, her compensation package was heavily weighted toward Incentive Stock Options (ISOs). On paper, Alena was becoming a millionaire. In reality, her bank account reflected the typical lifestyle of a high-earning tech worker in a high-cost-of-living area: comfortable, but not "pay-a-surprise-fifty-grand-to-the-IRS" comfortable.

Alena held options to purchase shares at a strike price of $5.00. The current Fair Market Value (FMV) had climbed to $105.00.

Alena knew she needed to exercise. She wanted to start the one-year holding clock required to qualify for Long-Term Capital Gains (LTCG). If she waited until the IPO to sell, she’d be taxed at ordinary income rates—potentially losing nearly 40% of her gain to federal and state governments.

Alena faces a massive tax bill because the AMT treats her unsold stock option gains as immediate, taxable income.

To understand Alena’s panic, one must understand the "Shadow Tax System." The Alternative Minimum Tax was originally designed to prevent the ultra-wealthy from using loopholes to pay zero tax. However, it has evolved into a trap for tech employees with ISOs.

Under regular tax rules, exercising an ISO is not a taxable event. You buy the stock, and nothing happens until you sell it.

But the AMT system plays by different rules.

For AMT purposes, that $100 "spread" (the discount Alena received) is treated as income the moment she clicks "Exercise" on Carta. Even though she hasn't sold a single share and has no extra cash in her pocket, the IRS views her as having "earned" that value.

When Alena ran the numbers through a standard tax calculator, the results were grim. By exercising her full $100,000 spread, her "Alternative Minimum Taxable Income" would skyrocket, triggering an immediate tax bill of roughly $38,000.

She was stuck. She couldn't afford the tax bill, but she couldn't afford not to exercise and risk the massive tax hit later during a post-IPO "disqualifying disposition."

Rally Tax helped Alena exercise $33,500 in ISOs tax-free by identifying the "sweet spot" where her AMT matched her regular tax.

When Alena came to Rally Tax, we didn't just look at her current year's taxes. We looked at her entire financial trajectory.

The secret to ISO planning lies in the mathematical delta between your Regular Tax and your AMT. You only pay AMT if your AMT calculation is higher than your regular tax.

There is a "sweet spot"—a specific dollar amount of ISOs you can exercise where your AMT rises but remains exactly equal to (or just below) your regular tax. This is what we call your Annual AMT Room.

Our team performed a deep-dive analysis into Alena’s finances, including:

We discovered that Alena had roughly $33,500 of "AMT Room" available. She could exercise that amount of spread and pay exactly $0 in additional tax.

Alena avoided all AMT by strategically spreading share exercises over three years to stay within annual exemption limits.

We didn't suggest Alena exercise all at once. We proposed a surgical, multi-year strategy designed to "shave" the tax bill down to nothing.

In December, Alena exercised a specific number of shares to trigger exactly $33,000 of spread. We monitored her final paychecks to ensure no year-end bonus pushed her over the edge.

By exercising the second batch in January of the following year, we maximized the time Alena had to save for any potential tax volatility while securing a second $33,500 "AMT Room" allotment.

In the third year, as Databricks moved closer to its S-1 filing, Alena exercised the remaining shares. By this time, she had also received an AMT Credit from a small prior-year exercise, which we used to offset her final liabilities.

By using professional guidance over a panic sale, Alena eliminated a $38,000 tax bill and secured her financial future without taking on debt.

The outcome was a total transformation of Alena's financial future.

Alena didn't have to sell her car or take out a high-interest "personal loan for taxes." She simply used the system as it was intended—with professional guidance.

Most tax software is "reactive." It asks you what happened last year. By the time you enter your ISO exercise into a standard tax app in April, it’s too late. The tax is already owed.

Rally Tax is proactive. We specialize in "Tax Modeling"—predicting the future to change the outcome of the present.

Many people don't realize that AMT paid on ISOs isn't always "lost" money. It often creates a Minimum Tax Credit. This credit can be used to lower your taxes in future years. At Rally, we track these credits like hawks, ensuring that if you do pay a dollar in AMT, you get that dollar back as soon as the law allows.

Are you vesting in California but living in Texas? The "trailing nexus" of state taxes can be a nightmare. Alena’s plan had to account for the fact that California "claws back" tax on shares that were granted while she worked in-state, even if she moved later. Rally’s multi-state expertise ensures you don't get double-taxed.

For founders or very early employees, the ISO strategy often intersects with 83(b) elections. If you exercise unvested shares, you can lock in a $0 spread FMV, effectively making the AMT a non-issue. However, the window to file an 83(b) is only 30 days. We help our clients hit these deadlines with 100% accuracy.

Not everyone can exercise $100k for $0. If your spread is in the millions, you will likely owe some tax. But the goal isn't just "zero tax"—the goal is Optimal Tax.

Whether it’s maximizing your AMT room, utilizing AMT credits, or timing your exercise to coincide with a lower-income year, there is always a lever to pull.

We don't just file forms. We build "Financial Thrillers" where you are the hero who keeps their hard-earned wealth.

The Villain is coming for your equity. Don't let it win.

Frequently Asked Questions

The AMT Gap (or "AMT Room") is the amount of ISO spread you can trigger without actually having to pay any Alternative Minimum Tax.

The IRS compares your taxes under two different systems: Regular Tax and AMT. You only pay the higher of the two. If your Regular Tax is $30,000 and your AMT calculation is $25,000, you have a $5,000 "cushion." Since the AMT rate is typically 26%, you can divide that $5,000 cushion by 0.26 to find your room—in this case, about $19,230 in ISO spread.

Think of AMT as a pre-payment or a "timing tax," not a permanent loss. When you pay AMT on an ISO exercise, you usually generate an AMT Credit (Form 8801).

In future years, when your regular tax is higher than your AMT (usually when you aren't exercising options), you can use that credit to lower your tax bill dollar-for-dollar. It effectively "refunds" the extra tax you paid today.

The IRS limits the amount of ISOs that can vest in a single year to $100,000 (based on the grant/strike price, not the current value). If you have a massive grant and $150,000 worth of options vest in 2026, the first $100k are treated as ISOs, and the remaining $50k automatically convert into Non-Qualified Stock Options (NSOs).

Note: NSOs are taxed as ordinary income the moment you exercise them, which can be even more expensive than the AMT.

This is a major trap for the "Tech Nomad." If your options were granted while you worked in California, but you exercise them while living in Texas, California will often still "claw back" taxes on the portion of the shares that vested while you were in CA.

Texas has $0 state income tax, but you’ll still owe Federal AMT. California has a state-specific AMT of 7%, which is one of the highest in the country. We help calculate the exact "allocation ratio" to ensure you don't overpay.