What happens to the AMT adjustment basis if stock is swapped?

July 23, 2001

Date:   Mon, 23 Apr 2001
From:   Mark, EA

I ran across your website when I was looking to solve an AMT delimma for a tax client. I am very impressed with the site, and we’re purchasing your book.

This question is similar to your September 4, 1999 question from Heidi Bixby. The only difference is that the stock previously owned had an AMT adjustment before the swap. Here goes…

Client owns stock which he had purchased through exercising ISO’s 5 years ago. When he exercised the ISO’s, he paid AMT. So the stock which he now owns has an AMT adjustment basis. If he were to sell the stock, a negative adjustment entry would be made to the 6251. He doesn’t sell the stock.

He swaps it to exercise more incentive stock options. I understand the allocation of income tax basis to the new shares. I understand the AMT consequence of exercising the new ISO’s. Here is what I do not understand…

When the stock is swapped, what happens to its original AMT adjustment basis? Does it get allocated to the newly created shares? Or does it create a negative adjustment on the 6251 in the year of the swap?

Thank you,

Mark, EA


Date:   10 May 2001

Hello Mark,

Thanks for writing.

In your example, the AMT basis adjustment carries over to the shares acquired.

The same number of shares as the number swapped are considered as continued to be held. That number of shares will continue to have the same basis adjustment. (The AMT adjustment for the new exercise is assigned to the additional shares received. These rules are the same as those that apply for regular tax to shares acquired by exercising a non-qualified stock option with a swap. Refer to those regulations.)

If the holding period requirements weren’t met, there would have been an early disposition of the previously-acquired ISO shares, resulting in ordinary income for regular tax and a basis adjustment for AMT.

I hope this helps.

Good luck!

Mike Gray

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

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