If you’re a tech employee, founder, or executive with incentive stock options (ISOs), you might be wondering when the best time to exercise them is. Maybe you’ve heard that January is the ideal month, but you’re not sure why—or if it even applies to you.
You’re probably asking this question if:
- You’re trying to avoid paying too much in taxes.
- You’re unsure how long you should hold your shares after exercising.
- You’re curious about how your company’s IPO stage might change your strategy.
The good news? Exercising ISOs in January can make a lot of sense, especially when it comes to giving yourself extra time to plan and adjust.
Let’s break it all down, step by step, so it’s easy to follow.
Why January is the Best Time to Exercise ISOs
When you exercise ISOs in January, you’re giving yourself the gift of time. Here are a few of the reasons why:
#1 You Start the Timer for Long-Term Capital Gains
One of the biggest benefits of exercising ISOs is the potential to pay long-term capital gains (LTCG) tax instead of regular income tax when you sell your shares.
Why Wait?
To qualify for LTCG (a lower tax rate), you need to meet two rules:
- Hold the shares for at least one year and one day after exercising.
- Wait at least two years from the grant date of the options.
Once you meet these holding requirements, the profits from selling your shares are taxed at the lower LTCG rate instead of your higher ordinary income tax rate.
How January Helps
Exercising in January starts the one-year holding period at the very beginning of the year. This means you’ll hit that one-year mark early next year, giving you more flexibility to sell your shares sooner.
If you wait until later in the year to exercise, you also push the one-year mark further out.
For example:
- Exercising in January 2025: You can sell your shares in January 2026 and qualify for LTCG.
- Exercising in December 2025: You have to wait until December 2026 to sell and qualify for LTCG.
The earlier you exercise, the sooner you can sell while benefiting from the lower LTCG rate.
#2 You Get More Time to Handle Taxes
When you exercise ISOs, it can trigger a tax called the Alternative Minimum Tax (AMT). This tax is calculated separately from your regular taxes, and while it might sound complicated, the key thing to remember is that it doesn’t have to be paid immediately.
Why January Makes a Difference
If you exercise ISOs in January, you have a significant advantage: time. The AMT you trigger in January isn’t due until the following year’s tax deadline—usually April 15. That gives you up to 15 months to:
- Save for the AMT bill. Use the extra time to set money aside so the payment isn’t stressful.
- Decide if selling shares makes sense. If you need to cover taxes, you’ll have time to think through selling options.
- Adjust if the stock price changes. If your company’s stock price goes up or down, you have more time to adapt your strategy.
What Happens If You Wait?
If you wait until later in the year to exercise, you’ll shorten the time you have to prepare for the AMT. For example:
- Exercising in January: You have 15 months to plan.
- Exercising in December: You only have four months to handle the same tax bill.
This shorter window can make things more rushed and stressful, especially if the stock price changes or you need to free up cash quickly.
#3 You Can Adjust if Stock Prices Drop
Exercising ISOs involves some risk because the stock price could fall after you exercise. This means you might pay taxes on a higher value than the shares are worth when you sell them.
How January Helps
If you exercise in January and the stock price drops later in the year, you have the option to sell the shares before December 31. This is called a disqualifying disposition, and it can help you avoid paying more taxes than necessary.
Why It Works
By selling in the same year, you can eliminate the AMT triggered at exercise. Your taxes will be based on the lower sale price instead of the higher exercise price.
This flexibility isn’t available if you wait until late in the year to exercise.
How to Decide How Much to Exercise in January
One of the best ways to figure out your strategy for exercising ISOs in January is to look at your company’s IPO (Initial Public Offering) status.
Whether your company is pre-IPO, planning an IPO this year, or already post-IPO, this status can help you decide the right approach and how much of your ISOs to exercise.
Here’s how we recommend thinking about it:
Pre-IPO: Your Company Isn’t Public Yet
If your company is pre-IPO—meaning it hasn’t gone public yet, and there’s no clear timeline for when it will—your approach in January should focus on being cautious and tax-efficient.
The goal is to minimize your risk.
Start with the Alternative Minimum Tax (AMT) Threshold
The first step is to figure out how much you can exercise without triggering AMT. You can do this by looking at last year’s tax information:
- Pull your December 31 paycheck or last year’s W-2.
- Use these to calculate how much income you had last year.
- Based on that, estimate how much you can exercise without pushing yourself into AMT territory.
Exercising just up to this threshold is a safe and efficient way to get started.
If You Want to Go Beyond the AMT Threshold
If you’ve got extra cash and are comfortable taking on more risk, you can choose to exercise more than the AMT threshold. In this case, it’s helpful to set a budget:
- Calculate the Total Cost: Add the cost of buying your shares to the AMT you’ll trigger by exercising them.
- Decide on Your Budget: How much are you comfortable spending overall? For example:
- $50,000
- $100,000
- $500,000
- Exercise Up to That Budget
Stick to your chosen limit. This approach gives you control over how much you’re spending and reduces the risk of unexpected tax surprises.
Reevaluate in December
Exercising ISOs isn’t just a one-and-done decision for the year. By the time December rolls around, you’ll have a clearer picture of your total income and tax situation for the year.
- In December, you won’t need to rely on last year’s income to estimate your AMT threshold. You’ll know exactly how much you’ve earned this year.
- This can open up an opportunity to exercise additional shares without triggering more taxes than expected.
IPO This Year: Balancing Caution and Opportunity
If your company is expected to go public this year, your strategy becomes more dynamic. Whether the IPO is just a rumor or has been officially announced, it’s important to adjust your approach to match the level of certainty.
If the IPO is Rumored
When an IPO is only a possibility but hasn’t been confirmed, it’s best to proceed cautiously, with some room for flexibility.
- Stick to a Cautious Strategy
Start by exercising a modest amount of your ISOs—just like you would if your company were still pre-IPO. Use last year’s income to estimate how much you can exercise without triggering AMT, or set a budget that includes the cost of exercising and the taxes involved. - Consider Being Slightly More Aggressive
If you feel confident that an IPO is likely this year, you might exercise more than you would if the company were still firmly pre-IPO. The potential for a liquidity event (the chance to sell your shares after the IPO) could make the extra tax risk worth it.
If the IPO is Official
When an IPO is officially announced, the level of certainty changes everything. Now, you can build a more aggressive strategy:
- Identify Key IPO Dates
Pay attention to important milestones, including:- The expected listing date.
- The anticipated first trading day.
- Any lockup period restrictions (these often last six months and prevent you from selling shares immediately after the IPO).
These dates help you plan when you’ll likely be able to sell shares and cover any taxes triggered by exercising.
- Adjust Your Exercise Amount
Knowing the IPO is happening soon gives you more confidence to exercise a larger portion of your ISOs, even if it means triggering AMT. The ability to sell shares post-IPO can help you manage the tax bill. - Revisit Your Plan After the IPO
Even if the IPO happens later in the year, it’s a good idea to reevaluate your ISO strategy during trading windows. Post-IPO trading restrictions (like the lockup period) will determine how quickly you can act.
Post-IPO: Time to Maximize Opportunities
If your company has already gone public, January is the perfect time to take full advantage of your ISOs. You have more clarity and flexibility than in any other stage, so this is when you can afford to be the most aggressive.
Exercise Everything in January
Once your company is public, liquidity (the ability to sell your shares) is typically not an issue anymore. This means you don’t have to be as cautious about triggering AMT because you’ll have opportunities to sell shares to cover the taxes.
- Exercising all your ISOs in January starts the clock on long-term capital gains for every share. This positions you to sell them at a lower tax rate sooner.
- You don’t have to factor AMT as heavily into your decision-making since selling post-IPO shares is usually straightforward.
Monitor Stock Performance During Trading Windows
Public companies typically have quarterly trading windows—specific times after earnings announcements when employees can sell shares. Use these windows to check how the stock is performing and adjust your strategy accordingly:
- If the Stock Price is Stable or Rising
- Continue holding your shares to meet the long-term capital gains holding period. This allows you to benefit from the lower tax rate on any profits.
- If the Stock Price Drops
- Identify your break-even point—the lower stock price where you lose the benefits of lower long-term capital gains rate.
- Consider selling shares if the price drops below this point to avoid losing the tax advantage of exercising early.
In summary? After your company is public, January becomes the ideal time to exercise all your ISOs. The ability to sell shares at regular intervals means you can focus on maximizing gains and managing taxes without the uncertainty of pre-IPO or IPO-stage limitations.
Get More Help with Exercising Incentive Stock Options
We hope this guide helps explain why exercising your ISOs in January can make a lot of sense.
It’s all about giving yourself more time—time to qualify for long-term capital gains, time to plan for taxes, and time to adjust if stock prices change. Whether your company is pre-IPO, planning an IPO, or already public, the earlier you start, the more options you’ll have.
Have more questions about your ISOs?
This is exactly what we do at KB Financial Advisors—we help tech professionals like you navigate decisions about stock options, taxes, and financial planning in a way that’s clear and stress-free.
Book a quick introductory call with us today to see how we can help simplify your strategy and set you up for long-term success.
In the meantime, check out this blog post on pre-IPO planning that we think you might find helpful.
Until next time!
