A taxpayer has an Incentive Stock Option (ISO) grant. They exercise the options and hold the stock. Two years later, they sell the stock. The sale price is lower than the exercise price. What is the tax treatment?

Answer options:

Ordinary Loss

Capital Loss for Regular Tax; AMT Adjustment reversal.

Long-term Capital Loss for Regular Tax; AMT Basis is higher so AMT Loss is larger.

Disallowed Loss

How to approach this question

1. Regular Tax: Basis = Exercise Price. Sale < Basis -> Capital Loss. Held > 1 year -> Long-term. 2. AMT: Basis = FMV at exercise (which was higher than exercise price). Sale < Exercise Price means Sale < AMT Basis. 3. Result: Loss for Regular Tax. Larger Loss for AMT (since AMT basis was higher).

Full Answer

C.Long-term Capital Loss for Regular Tax; AMT Basis is higher so AMT Loss is larger.✓ Correct

For regular tax, the basis is the exercise price. For AMT, the basis is the FMV at exercise (which included the bargain element). Since the stock was sold for less than the exercise price, there is a capital loss for regular tax. For AMT, the loss is even larger because the AMT basis was higher.

Common mistakes

Forgetting the AMT basis difference.

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