Deducting Losses from Sale of ISOs (USA)

Submitted by _Nothing_Left_ t3_11do549 in personalfinance

First post here, so please let me know if I am breaking any rules or conventions.

2 years ago, I purchased (exercised) Incentive Stock Options (ISO) Nonqualified Stock Options (NSO). I paid significant State and Federal (USA) Supplemental Income Tax based on the Fair Market Value (FMV) at the time. The company has since gone public, and the stock price has dropped. Within a year it dropped by half and now it is less than 10% of the original value.

I am planning to sell this stock, but I want to be smart about it. How can I recoup some of these lost tax dollars? Do I have to sell over multiple years? Do I have to have a certain tax liability? I am not familiar with this type of tax situation. Does it matter if I am filed jointly vs separately?

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Edit: per comments from u/Mysunsai I believe these are actually NSOs. Unfortunately, I cannot update the title.

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Mysunsai t1_ja9t5wu wrote

> I paid significant State and Federal (USA) Supplemental Income Tax based on the Fair Market Value (FMV) at the time.

Are you talking about alternative minimum tax?

Because otherwise, there are no taxes on exercising of ISOs, only on sale is tax applied.

Assuming you are talking about alternative minimum tax, you gain a credit for the excess taxes paid in every year you are not subject to AMT.

Since it’s now been 2 years since exercise, you are free to sell whenever, and you’ll eventually recoup the AMT (unless you are always subject to AMT, in which case you are still free to sell whenever and the AMT tax rates are just what you pay).

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_Nothing_Left_ OP t1_ja9zhxn wrote

Because the cost basis I paid for the shares was significantly below the FMV at the time, the difference in cost was considered as additional income from my employer. Thus, I paid 22% in supplemental income tax at the time of purchase.

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Mysunsai t1_jaa1v3m wrote

ISOs do not work like that, either you are talking about something else (like an NSO) or you and your employer messed up badly.

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_Nothing_Left_ OP t1_jaa2xpf wrote

Perhaps this is an NSO. The documentation online had info about both ISO and NSO. Maybe because some other employees had ISOs? This is probably just my inexperience with the topic. Thank you for the help.

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Mysunsai t1_jaafdji wrote

In that case, your sale just results in capital losses now, unrelated to your previous taxes. If you end the year with a net capital loss, up to $3k of that reduces your other taxable income, and the rest carries forward to future years.

Your previous taxes occurred in the past, and are no longer important to anything that goes on now.

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_Nothing_Left_ OP t1_jae5zve wrote

Thanks for your responses and being patient with me. I appreciate it.

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