Subject:   Capital Loss Carryforward and AMT
From:   Bill

Great article, by the way. Do you have any offices in New York?

My first question: Can I usa a capital loss to offset my AMT liability? As I understand it, AMT with ISO options is meant to compensate for the fact that you have “made” money that you just haven’t collected on yet. In my case, I will not owe any taxes on the capital gain from the ISO options because of my accumulated capital loss carryforward from previous years.

To illustrate:

Say I exercised 1000 options with a strike of $1 when the stock was at $101. I have a $100,000 gain that is subject to AMT, right? Now suppose I have a $200,000 capital loss carryforward from the previous tax year–will that be able to offset the $100,000 gain that is subject to AMT?

It’s a conundrum because I can’t sell the stock to realize the gain either, because it won’t be counted as capital gain unless I wait until next year.

Also (separate question), does short-term capital gain fit anywhere in the ISO world? It seems that when I sell to close out a position, I would either be taxed as ordinary income (if I had a disqualifying event), or a long-term capital gain. There doesn’t seem to be any way to sell for a short-term gain, or is there?

Thanks for your help–you are doing a great service!

Answer

Date:   28 Jul 2000

Hello Bill,

1. A capital loss carryover may not be used to offset the ISO adjustment for exercising an incentive stock option. The ISO adjustment is “additional compensation,” not a capital gain.
2. You can have a short–term capital gain when you sell stock acquired from exercising an ISO. Only the excess of the fair market value of stock on the date of exercise over the exercise price is taxed as ordinary income. Any gain recognized from selling the stock held not more than one year in excess of the ordinary income amount is taxed as a short-term capital gain. For example, an ISO is exercised for ABC stock with a total option price of $50,000. The fair market value of the stock on the date of exercise is $100,000. Six months after exercise, the stock is sold for $150,000. The taxpayer will report a short-term capital gain for the sale of $50,000.

Good luck!

Mike Gray

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