How are ISOs treated for alternative minimum tax purposes?
August 24, 2001
Date: Wed 04 Apr 2001
From: Mike
If ISO shares were bought last year (2000)… if the stock dropped a significant amount from the exercise date in 2001 (a common problem these days)… is the negative adjustment on form 6251 for 2001 on line 9 adjusted gain or loss limited to only a $3,000 AMT capital loss on the ISO shares or are you allowed to get a negative adjustment of $100,000?
Answer
Date: Wed 25 Jul 2001
Hello Mike,
The answer to your question is, for altnerative minimum tax purposes, ISOs are treated as NQOs.
Ordinary income is reported for the year of exercise.
Capital gain or loss is reported for the year of sale.
A second Schedule D should be prepared, showing the tax basis of the ISO stock equal to the fair market value on the date of exercise. The AMT capital loss is also subject to the $3,000 annual limit.
The difference between the regular tax net capital gain or loss and the alternative minimum tax net capital gain or loss (after the $3,000 limit) is reported at line 9 on Form 6251.
The capital loss limitation can make it hard to recover your alternative minimum tax credit. If possible, generate capital gains from other sources to eliminate the capital loss.
Good luck!
Mike Gray
Question 2
Date: Wed 25 Jul 2001
Thanks for your response to my question
…the only thing that I am still a little confused about is that if a taxpayer has a disqualifying disposition for ISO purposes in year 2 when they had exercised ISO stock in year 1 and reported alternative minimum tax gain in year 1, don’t they get a corresponding negative adjustment of their alternative minimum tax gain in year 2 on form 6251 (not subject to the alternative minimum tax loss limitions because of the disqualifying disposition…..they held the stock for less than a year and it just happened to be in 2 different tax years?)
Thanks for your help!
Mike kapur
Answer 2
Date: 17 Aug 2001
Hello Mike,
As I said, for AMT, ISOs are treated as NQOs. This means the purchase transaction was “closed” in the year of exercise.
The sale of the stock is reported with the adjusted basis equal to the fair market value on the date of exercise is reported on an AMT Schedule D. As a result, you will report a short-term capital loss for the sale of the stock for AMT. The $3,000 loss limit applies.
By comparing the result on the AMT Schedule D with the Regular Tax Schedule D, you determine the gain or loss adjustment to report on Form 6251.
That’s as far as I can go for a free answer. If you need more help, hire a tax return preparer.
Good luck!
Mike Gray