Confirm this with your tax advisor, but FMV at exercise is your basis in later years (generally because the difference in FMV and strike will have caused you a taxable event).
Edit: Consider the case where this were not treated as true. You're clearly not going to pay $2 strike, exercise at $5 ($3 of employment income due to the bargain element), sell at $10 in a later year and pay on $8 of capital gains, right?
I'll note for conceptual understanding (by people who aren't patio11, who I'm sure understands this all far better than me) the general point that a gain or loss on the sale of a capital asset is how much money you got from selling it minus how much you "paid". More technically, how much you "paid" is called the basis, and you can do things that adjust the basis as patio11 noted above.
That's a really good question. I'm not certain of the answer.
When I had this happen to me the FMV was slightly higher than my exercise price, but not enough to trigger AMT. I know I only wrote off the actual cash I lost, and I used a CPA to help me make sure I did it correctly.
I recently asked a tax advisor a similar question: if I do a cashless exercise sale for $5 when the FMV is $6 and my strike price is $2, can I pay income tax only on the $5 sale price? The answer was no: I would owe income at the $6 price and then immediately accrue capital losses on the $1 spread between sale and FMV.
I guess that's a longwinded way of saying "I doubt it". Tax law around employee options is brutal. :/
c.f. https://www.untracht.com/news-insights/vantagepoint-newslett...
Edit: Consider the case where this were not treated as true. You're clearly not going to pay $2 strike, exercise at $5 ($3 of employment income due to the bargain element), sell at $10 in a later year and pay on $8 of capital gains, right?