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Date:   Thu, 26 Aug 1999
From:   Heidi, CFP

Dear Michael -

I found your website in search of an ISO question and found it very easy to understand - thank you. I do have one question regarding the swap of stock for the ISO options.

Let me give an example to ask my question:

600 ISO shares are exercised.
Grant price is $5.
Current stock price is $100.
Existing shares used to exercise - 25 shares with a basis of $10 + $500 cash.

AMT is calculated as follows: 600 X ($100 - $5) = $57,000. The $57,000 is considered an AMT preference item.

My question is on the 25 shares used to do the swap. Do they only maintain their original basis of $10, or do they now have an AMT basis of $100?

Thank you,

Heidi, CFP
Vancouver, WA

Answer

Hello Heidi,

You are supposed to avoid this issue by selling the entire block of stock!

Okay, I'll try to answer your question.

The regular tax basis of the 600 shares received is 25 shares, 100 shares, $5 per share; and 475 shares, zero per share.

The AMT preference is a "basis adjustment" for AMT reporting purposes of $100 for no cost shares and $95 per share for $5 shares, so the AMT basis per share is 25 shares, $100; 575 shares, $100 per share.

To show we're "in balance:"

Cash	$      500.00
Tax basis of 25 shares surrendered (25 X $10)	250.00
Tax preference (your computation)	57,000.00
Total AMT basis	57,750.00
AMT basis 25 shares (25 X $10)	250.00
AMT basis 575 shares (575 X $100)	57,500.00
Total	$57,750.00

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.