Stock Options About to Expire: What to Do Before the Clock Runs Out

For tech employees, founders, and early hires with ISOs or NQSOs approaching their option term — typically 10 years from grant. Decisions made here are largely irreversible. Not tax advice; your plan document controls specifics.

How long do stock options last?

The option term is set by your grant agreement and plan document. Two practical rules:

• ISOs: The IRS caps the ISO term at 10 years from grant date under IRC § 422(b)(1). On the grant's 10th anniversary, the option expires. Some plans use shorter terms — 7 years is common at certain companies. Check your grant agreement for the exact expiration date, not just the grant year.
• NQSOs: No statutory 10-year cap. Many companies mirror the 10-year ISO term for NQSOs, but some plans differ. Check the agreement.

For a tech employee who received a startup grant in 2015, 2016, or 2017 at a company now public or pre-IPO, those options may be approaching expiration in 2025, 2026, or 2027. Most employees don't actively track these dates until they're months away. By then, the best planning windows have often already closed.

Options in the money near expiration: NQSO

If you hold in-the-money NQSOs approaching expiration, the decision is simpler than for ISOs:

• Exercising and immediately selling is a same-day cashless exercise: the brokerage sells enough shares to cover the strike price and estimated withholding, and you receive the net proceeds.
• The entire spread — (FMV at exercise) − (strike price) — is ordinary income, subject to federal income tax (up to 37% in 2026), Social Security (6.2% up to the 2026 wage base of $184,500), and Medicare (1.45% + 0.9% Additional Medicare Tax above $200,000 single / $250,000 MFJ).²
• The tax rate is the same whether you exercise 2 years before expiration or 2 days before expiration. The only variable is the stock price at the moment of exercise.

The key risk is waiting. If the stock price drops below the strike price, options expire worthless with no recovery. If you hold NQSOs in the money within 12–18 months of expiration, you're taking pure market risk on a fixed position for no incremental tax advantage.

Decision rule for expiring NQSOs: If options are in the money and expiring in under 18 months, the only reason to delay exercising is conviction that the stock price will rise meaningfully before expiration. You are not preserving any tax advantage by waiting.

Options in the money near expiration: ISO

Expiring ISOs are more complex because the qualifying-disposition tax preference requires two holding periods that interact with the expiration date.

The qualifying-disposition window

Under IRC § 422(a)(1), a qualifying disposition requires selling more than 2 years after the grant date AND more than 1 year after the exercise date.³ For an ISO in year 9 or 10 since grant, the 2-year-from-grant requirement is already met. What matters is the 1-year post-exercise requirement.

The key calculation: to achieve a qualifying disposition on ISOs expiring in 12 months, you must exercise at least 12+ months before you want to sell. Importantly, the options expire — but shares you've already exercised do not. If you exercise 8 months before the option expiration date, you now hold shares. Hold those shares for 12 months from the exercise date, and the qualifying-disposition test is met — you don't need to hold through the original option expiration date.

Federal long-term capital gains rates for qualifying dispositions: 0%/15%/20% depending on income. The 20% rate applies above $533,400 (single) / $600,050 (MFJ) in 2026. Add 3.8% NIIT on net investment income above $200,000 single / $250,000 MFJ.⁴

ISO expiration and the AMT timing problem

Exercising ISOs creates an AMT preference item equal to (FMV at exercise − strike price) × shares. In 2026, the AMT exemption is $90,100 for single filers and $140,200 for MFJ, with phaseout beginning at $500,000 and $1,000,000 AMTI respectively.⁵

For a tech employee with a $1M spread exercising in year 9, the AMT bill can be $200,000–$300,000 in additional federal tax versus regular income tax. This AMT is recoverable via the AMT credit in future years (Form 8801, IRC § 53) — but only if future years generate sufficient regular-tax-over-AMT headroom. The calculation needs to span multiple years and is where a specialist earns their fee.

When disqualifying disposition is the better call

Sometimes exercising ISOs and selling immediately (a "disqualifying disposition") is smarter than holding for qualifying-disposition treatment. Cases to consider:

• Huge AMT exposure, low recovery horizon. If holding for LTCG qualification creates $400K of AMT and your future income is dropping (job change, sabbatical, winding down), AMT credit recovery may take 5–8 years or never fully materialize.
• High concentration risk. Holding a single-stock position for 12 more months to achieve the qualifying-disposition preference means accepting full market risk. If the stock falls 30% while you wait, the LTCG tax savings are easily wiped out.
• Cash constraints. Exercising and holding means paying the strike price plus potentially a large AMT bill without selling shares. A disqualifying disposition (exercise and sell same day) is self-financing — you receive proceeds net of tax.

A disqualifying ISO disposition generates ordinary income equal to the lesser of: (a) FMV at exercise minus strike price, or (b) actual sale proceeds minus strike price. Unlike NQSOs, disqualifying ISO dispositions are NOT subject to FICA taxes (Social Security or Medicare) — a meaningful savings on large spreads per IRC § 3121(a)(22)(B).¹

What happens when options expire worthless

If the stock price falls below the strike price before expiration, options expire worthless. Tax consequences are simple: no income, no deduction, no gain or loss. The option ceases to exist. The permanent loss of in-the-money value — if any existed — generates no deductible event.

Options going underwater before expiration: should you exercise now?

If your options are currently in the money but the company is trending down, you face a concentrated stock-risk question: exercise now at today's spread, or hold and risk expiration worthless. Key inputs:

• Your conviction in the company's future stock price
• How much of your net worth is tied to this position
• The tax cost of exercising today vs. gambling on price recovery
• Remaining time to expiration (longer runway = more time for recovery)

Standard financial planning suggests concentrated single-stock positions above 10–15% of net worth carry substantial undiversified risk. An advisor frames this as a portfolio decision, not just an option mechanics question.

Cashless exercise mechanics

If you don't have cash to pay the strike price, most public-company plans allow a cashless exercise (also called "same-day sale" or "sell-to-cover"). The brokerage exercises the options and simultaneously sells enough shares to cover the strike price and estimated withholding. You receive net proceeds.

Key points:

• A cashless exercise is always a disqualifying disposition for ISOs. You cannot achieve a qualifying disposition via cashless exercise.
• For NQSOs, cashless exercise is the standard approach — there was no qualifying-disposition pathway anyway.
• Track the exercise-date FMV as your cost basis for any shares not immediately sold. Brokerage 1099-B forms often report the wrong basis for ISO shares — review carefully at tax time.

Private company options cannot typically be cashless-exercised (no liquid market). You need actual cash — or a tender offer. Some late-stage pre-IPO companies run tender offers that create a secondary market for employee shares.

Decision timeline: when to act

Multi-grant sequencing matters

If you have multiple grants at different strikes, different types (ISO vs. NQSO), and different expiration dates, order of operations matters significantly:

• ISO $100K annual limit. Under IRC § 422(d), no more than $100,000 in option value (measured at grant date FMV × shares) can become exercisable in any calendar year and retain ISO status. Grants above this threshold automatically become NQSOs. If you have large grants, some shares may already be NQSOs you didn't realize were reclassified.
• AMT exposure stacks across grants. Exercising multiple ISO grants in the same tax year compounds your AMT preference items. Spreading exercises across years reduces AMT risk.
• Expiration sequencing. Exercise grants expiring soonest first. This sounds obvious but people routinely exercise newer grants (because the spread is larger) while letting older grants with lower strikes expire.
• Qualifying-disposition clocks run per-lot. Each exercise creates a separate lot with its own 1-year clock. A tax lot from a November exercise and one from March of the same year have different qualifying-disposition dates.

California and high-tax state considerations

California taxes the ISO exercise spread as ordinary income at the state level — no AMT-only treatment per FTB Publication 1004.⁶ California also has no LTCG preference, so qualifying-disposition gains are taxed at ordinary CA income tax rates (up to 13.3%). This substantially reduces the federal qualifying-disposition benefit for CA residents.

Former CA residents who worked in California during part of the option's vesting period may still owe CA income tax on a sourced fraction of any gain — even years after moving. If you've relocated from California, model the CA sourcing calculation before assuming you've escaped the 13.3% rate.

New York, Massachusetts, and other high-income states have similar rules. Multi-state sourcing obligations are common for employees who vested options across state lines and are complex enough that they warrant specialist review on positions above $500K.

Common mistakes with expiring options

• Not tracking expiration dates. Pull your grant agreements today and note the exact expiration dates. Set calendar reminders at 18, 12, 6, and 3 months out. For a $1M+ position, a 15-minute administrative task prevents an irreversible mistake.
• Assuming the employer will remind you. Some companies send reminders; many don't. You are responsible for tracking your own exercise windows.
• Letting significant in-the-money options expire accidentally. It happens — sabbaticals, family emergencies, the option just slipping through the cracks. Proactive calendar management is the entire mitigation.
• Conflating option expiration with post-termination expiration. If you've already left the company, the relevant window is your post-termination exercise period — typically 30–90 days for ISOs, and always much shorter than the 10-year option life. The 10-year clock only applies while you remain employed. See Stock Options When Leaving a Company for that scenario.
• Exercising the wrong grant first. Without modeling, people often exercise the highest-spread grant when the expiring low-strike grant is the one that needs action. Build a spreadsheet or get an advisor to run a sequencing model.
• Ignoring the AMT credit carryforward. Prior-year AMT from ISO exercises is recoverable as a credit. If you're entering a lower-income year, you may be able to accelerate that recovery — which changes the economics of exercising and holding this year. See ISO AMT Credit Carryforward.

When does a specialist pay for itself?

Options nearing their 10-year expiration often represent the single largest financial decision of the decade for a tech employee. For a $2M+ position, a fee-only specialist who models:

• Optimal exercise year for the AMT vs. LTCG tradeoff
• Qualifying-disposition feasibility given your specific timeline
• Cash requirements for strike price and potential AMT bill
• Multi-grant sequencing (which to exercise first and when)
• Multi-state sourcing obligations
• AMT credit carryforward recovery in the exercise year and beyond

...typically produces tax savings worth 20–50× the advisory fee on a position of that size. This is not a decision to navigate alone with TurboTax or a generic retirement calculator.

Sources

1. IRC § 422 — Incentive Stock Options. § 422(b)(1): option term cannot exceed 10 years from grant date. § 422(a)(1): qualifying-disposition requirements (2-year/1-year holding periods). § 3121(a)(22)(B) (via cross-reference): disqualifying dispositions of ISO stock excluded from FICA wages — unlike NQSOs, no Social Security or Medicare tax on ISO exercise income.
2. IRS Publication 525 — Taxable and Nontaxable Income. NQSO taxation: spread at exercise is ordinary income subject to income-tax withholding and FICA (Social Security + Medicare). 2026 SS wage base $184,500 per SSA. 0.9% Additional Medicare Tax above $200,000 (single) / $250,000 (MFJ) per IRC § 3101(b)(2).
3. IRC § 422(a)(1) — Qualifying Disposition Requirements. Qualifying disposition requires: (a) sale more than 2 years after grant date, and (b) sale more than 1 year after exercise date. Both conditions must be met. A disqualifying disposition under § 422(c)(2) recognizes ordinary income equal to the lesser of (FMV at exercise − strike price) or (sale proceeds − strike price).
4. Tax Foundation — 2026 Long-Term Capital Gains Brackets. 20% LTCG rate for single filers above $533,400, MFJ above $600,050. 3.8% NIIT on net investment income above $200,000 (single) / $250,000 (MFJ) per IRC § 1411. Values verified April 2026.
5. IRS — 2026 AMT Inflation Adjustments (OBBBA). AMT exemption: $90,100 single / $140,200 MFJ. Phaseout begins at $500,000 (single) / $1,000,000 (MFJ) AMTI at 50-cent rate per dollar of AMTI (OBBBA change from prior 25-cent rate). Verified April 2026.
6. California FTB Publication 1004 — Stock Option Guidelines. CA taxes ISO exercise spread as ordinary income at exercise — no AMT-only treatment. No LTCG preference at CA state level; qualifying-disposition gains taxed at ordinary income rates (up to 13.3%). CA does not conform to federal QSBS exclusion under IRC § 1202.

Tax values verified against 2026 IRS guidance and OBBBA (July 2025). Stock option expiration decisions are time-sensitive and irreversible — specialist review 12–18 months before expiration is strongly recommended for positions above $500K.