How can I avoid AMT taxes for a higher spread than exists now?

September 15, 2000

Subject:   Question regarding rates and AMT
Date:   Fri, 25 Aug 2000
From:   Daniel

Hello Michael,

I had a question regarding AMT consequences, and also a question regarding your rates. Your website is very informative, but unfortunately I’m still a bit unclear about the AMT consequences of my situation. I don’t know if you’re still answering these questions via email, but I thought I’d give it a shot. 🙂

In January, 2000 I exercised the majority of my shares of a pre-IPO company that eventually went public. My strike prices on these shares ranged from about $1-$8, and I exercised all these shares at around $129. My intention was to hold them until at least January 2001, which would have qualified these stocks for the “2 year, 1 year” rule and would qualify for long-term capital gains (I was granted all of these stocks on or before January 1999).

Well, you can probably guess what happened next. My stock is hovering at about $40. To my understanding, if I hold the stocks into next year, I would have to pay AMT on the stock at $129. Well, basically, I would have to sell all the stock just to be able to pay the AMT consequences.

So, my long winded question is this: do I have any alternative other than sell the stock before the end of the year? I have a lot of faith in this company, and I think the price could climb to a high level again in the future, but obviously I’m very doubtful that will happen by April 15, 2001. I feel like I’m locked in, both by the short-term consequences and also by the fact that I only have ~4 months to let the the stock rise (if it rises at all).

Any advice you could give me in this matter would be GREATLY appreciated. Also, I don’t live too far away (San Francisco), and I’ve been looking for an accountant in the Bay Area for a while. Can you tell me a little about your rates? Also, would you be available sometime in the future for a consultation?

Thanks very much for your help. I look forward to hearing from you. Take care.

Danny Siudara


Date:   11 Sept 2000

Hello Daniel,

I’m sorry, but the best choice for you is probably to sell the shares before the end of the year. It’s the only way for you to avoid paying a high AMT when the value of your shares has declined.

The wash sale rule can apply to eliminate this tax benefit, so don’t purchase replacement shares of the same stock until more than 30 days after the sale date. Think carefully about the risk you are taking when making this decision.

Good luck!

Mike Gray

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

Comments are closed.