[whymsicalburito]

Are there tax benefits to exercising early? Hypothetically say I have some options with a pretty cheap exercise price, and I think the company will be taking on PE money in the near future, AND I have faith that the company will successfully exit in the future, will exercising early save me some taxes?

[harryh]

Yes. If you can exercise at a low price then all of your gains after that will be taxed at capital gains rates instead of ordinary income rates.

Note that if you just started you can likely "early exercise" all of your options right now by filing an 83B and paying the company the strike price. You generally have 90 days from the date of the option grant to do this.

[pianom4n]

This is just wrong. You pay capital gains, not ordinary income, tax regardless if you exercise early or not.

The only benefit to exercising early is to avoid the AMT impact.

[harryh]

This is not correct, and I'm not sure why you would think this. In general the way to think about capital gains is that you can't qualify for them unless you have purchased something that then appreciates in value.

So for stock options, you don't start the clock on the long term capital gains rate or set a cost basis for your capital gain until you exercise the option and shell out the cash for the strike price.

There is all kinds of information on the internet about this if you don't believe me.

[pianom4n]

I'm talking about incentive stock options (ISO), which is the most common thing to get. Non-statutory stock options (NSO) are entirely different and are not common for normal startup employees.

When you exercise ISOs, you are buying the stock at the strike price. It doesn't matter what the current market price of it is (other than for AMT). The cost basis is the strike price.

The "clock" for determine long-term vs short-term starts when you exercise, but it doesn't affect the cost basis. If you don't hold it long enough the gain may get taxed as short-term or ordinary income (usually no a difference except in a couple of states).

[jusob]

If the company qualifies as Small Business (see QSBS,, Qualified Small Business Shares) at the time you buy your shares (not vest), then there is no federal taxes at all (up to 10 millions).