The Three Major Traps 1. The AMT Surprise If you exercise Incentive Stock Options (ISOs) and hold the shares, you might trigger the Alternative Minimum Tax (AMT) even if you do not sell the shares. Many employees discover this at tax time when liquidity is low. 2. Ordinary Income vs Capital Gains Non-Qualified Stock Options (NSOs) are taxed as ordinary income at exercise. The difference between the strike price and fair market value becomes taxable immediately. Failing to plan for this can create an unexpected bill before any sale proceeds. 3. The Liquidity Mismatch You can owe taxes before you can sell your shares. This happens often in private companies without a secondary market, leaving employees cash-poor and tax-rich. Strategies to Avoid the Traps Plan early with a tax advisor before exercising. File an 83(b) election when eligible to prepay taxes at a low valuation. Exercise gradually rather than all at once to spread risk. Track valuation changes and company liquidity events closely. The smartest investors treat taxes as part of their equity strategy, not an afterthought. A well-timed exercise plan can turn an equity grant into lasting wealth instead of a costly surprise.