[marcinzm]

>Instead, the options are taxed at a capital gains rate

As I understand it, they ARE taxed as income for all intents and purposes at exercise time (based on the value difference at exercise). They are not regular income but they are part of Alternative Minimum Tax income. You pay taxes on the greater of the two. The difference between exercise price and sales price is then taxed as capital gains assuming you held the stock for a year (or two?).

The one trick to this is that if you exercise very early then the tax is on basically nothing (literally nothing if your option price and current value are identical). However, you still need to buy the options so it's not free but just tax free.

[nemo44x]

Another trick, if it makes sense at the time, is to work out what your AMT threshold will be and only exercise enough options to keep it at 0 or something you're comfortable with.

This is especially useful if you have ISO's currently vesting and the company has since gone public.