“I’m Going to Exercise and Hold My ISOs!”... Are You Sure?
Why “saving on taxes” isn’t automatically the right answer
Gibran Le, CFP®, CRPC®
Introduction
In the world of equity compensation, this one comes up all the time. After a little research, most people decide to exercise and hold their Incentive Stock Options, or ISOs, to capture the tax benefit. (Want a refresher on how that works? Check out my stock option basics article.)
I think that oversimplifies things. The idea behind “exercise and hold” is that saving on taxes is always the best move, and that’s where people get tripped up. The real answer is more involved. You have to weigh the tax benefit against the diversification benefit before you decide anything. Those two things can look completely different from one person to the next, and that difference can change what you should actually do.
So let’s get right into it. Here are three variables worth thinking through before you commit.
1. Your Taxes
For simplicity, let’s assume your long-term capital gains rate is either 18.8% or 23.8%. Both include the 3.8% Net Investment Income Tax. That extra tax kicks in once your income climbs above $200,000 as a single filer, or $250,000 as a married couple filing jointly. I’m only covering federal taxes here, since state rules vary.
Here’s the part people overlook. Your filing status alone can change the decision in a big way. Tax brackets are wider for married couples, so the same income can put you in a very different marginal rate. Let me show you with two people who earn the exact same amount.
Person A is single with $280,000 of taxable income. In 2026, that puts their marginal income tax rate at 35% and their long-term capital gains rate at 18.8%. If they exercise and hold, and prices stay flat, the tax benefit works out to roughly 16.2%.
Person B is married filing jointly, with a spouse who isn’t working, and the same $280,000 of taxable income. Same income, but the brackets treat them differently. At that level, a married couple sits in the 24% bracket, with the same 18.8% long-term capital gains rate. So holding for the year only saves them about 5.2%.
That’s a meaningful gap. Person A’s tax benefit is more than triple Person B’s. So Person B faces a real question: does it make sense to take on the concentration risk of holding a single stock just to save 5.2% in taxes? The answer isn’t obvious. It all depends on what the person is trying to accomplish. If they need the money in the short-term, it might make sense for them to exercise and sell and deal with ordinary income tax rates. If their goals aren’t affected by the concentration risk, it might make sense for them to hold. This is where financial planning comes in.
2. What You Pay for the Stock vs. What It’s Worth
Let’s say you hold 10,000 options with a strike price of $1, and the shares have a fair market value of $10. A co-worker has 10,000 options from the same company, but their strike price is $5.
You can buy the same number of shares, but the cost to get there is very different. You’d pay $10,000 to exercise, while your co-worker would pay $50,000. That’s a $40,000 gap in cash out of pocket for the identical position. If prices hold steady, you both end up with benefits, but one of you had to put far more of your own money on the line to get it.
This changes the conversation, because now it’s about managing risk and not just chasing the tax break. So ask yourself a couple of honest questions. Can you afford to park that cash in your company stock and leave it there for a full year before you can touch it again? And will that money still be worth as much, or more, a year from now? Those answers matter just as much as the tax math.
3. The Alternative Minimum Tax
AMT is the wildcard, and it really does vary from one person to the next. Over the years, I’ve run projections that landed in completely different places. Some people exercised their options and owed no AMT at all. Others exercised and ended up with an AMT bill to pay. And I’ve worked with people who exercised some shares while selling others in the same year, so they could manage their concentration risk and their AMT exposure together.
This matters for the “exercise and hold” decision. AMT can create a tax bill on gains you haven’t received in cash. If you want the full breakdown of how that works, I cover it in my ISO and AMT article. For now, just know it’s one more reason “exercise and hold” deserves a closer look before you treat it as the default.
The Bottom Line
The whole point of this article is simple. Deciding to exercise and hold purely for the tax benefit is the wrong way to frame the decision. ISOs are simple in nature, but complex in how you put them to work. The right move depends on your taxes, your cash, your risk picture, and how all those pieces fit together.
Thanks so much for giving this a read. Until next time.
Gibran Le, CFP®, CRPC®
Equity Edge Advisors