Three Thousand Dollars a Year: What happens if my stock options go to zero?

When your stock options work out, the IRS gets paid fast. Exercise and the alternative minimum tax can tax your paper gain by the following April. Sell and the capital gains bill shows up with that year's return.

When they don't work out? The money comes back painfully slowly. A loss on shares you paid real money for comes back at $3,000 a year. A loss on options you never exercised comes back at $0. And AMT you paid on a gain that later evaporated comes back over years.

Taxed at full speed on the way up, refunded at a drip on the way down. That asymmetry is the whole game.

How did I end up underwater?

Meet Gavin, an early engineer with 30,000 incentive stock options (ISOs) at a $4 strike price, the price his grant lets him pay per share.

In March 2026, the company's 409A appraisal (the official price tag on a private share) said each share was worth $20. Gavin exercised 25,000 options: he wrote a $100,000 check for shares supposedly worth $500,000. On paper, he was up $400,000.

Here's the catch. Exercising an ISO creates no regular income, but the IRS runs every return twice: the normal calculation, and a stricter one called the alternative minimum tax. You pay whichever is higher. The AMT counts that $400,000 paper gain as real income. On Gavin's $175,000 salary, that works out to an extra $100,500 in tax, due April 2027.

Then the company fell apart. The next funding round died in September. In November, the board took the only offer left: $2.50 a share, closing in February.

So where does that leave Gavin?

• His 25,000 shares sell for $62,500.
• His 5,000 unexercised options are cancelled. Worth nothing.
• The $100,500 AMT bill? Still due. What the AMT locks onto isn't the exercise — it's whether he still held the shares on December 31. He did. The company falling apart in February changes nothing.

Add it up: $100,000 paid for shares, $100,500 owed in tax, $62,500 coming back. Gavin is $138,000 out of pocket on equity that was supposedly worth half a million. The tax code has an answer for every piece of this. None of them are fast.

My options were cancelled for nothing. Can I deduct that?

No. And this surprises almost everyone.

A deduction measures money out, not value lost. Gavin never paid for the options themselves (the grant was free), so the IRS's view is simple: nothing he paid went anywhere. No purchase, no sale, nothing to report. Options that die unexercised leave no mark on a tax return at all. Same goes for options at a company that went under, or options that lapse when the ninety-day window closes after leaving a job.

Harsh, but it's actually the gentlest outcome on this page. The options cost nothing, so zero is where he started. People who lost only unexercised options lost paper. The people who exercised wrote real checks, and those are the ones that don't come back.

I sold the shares for less than I paid. What can I deduct?

The difference between what you paid and what you got back. That's a capital loss. Gavin paid $4 a share and got $2.50 back, so he lost $1.50 a share. Across 25,000 shares, that's a $37,500 loss on his 2027 return.

Now, if you google this, you'll immediately hit a scary term: disqualifying disposition. Selling ISO shares within a year of exercising normally converts your paper gain into taxable wages. One more bill. Don't worry about it here. The wage income can never be more than your actual profit, and Gavin sold below his strike price. No profit means no wages and nothing on the W-2. The $400,000 paper gain simply drops out of the story. When you sell at a loss, an ISO share is taxed like any other losing stock. (If he'd sold at $7, above the strike but below the appraisal, he'd owe wages on the real gain: $3 a share.)

Gavin got off easy in one way: his options were ISOs. If yours are NSOs instead — nonstatutory options, the other common kind — the crash hits harder. An NSO taxes the paper gain as wages the day you exercise, and that also sets your purchase price at $20. The same $2.50 sale becomes a $17.50 loss per share: $437,500 in all. A bigger loss stuck in the same tiny pipe. Worse, the wage tax you paid at exercise never comes back. There is no NSO credit.

How fast does the loss come back?

A capital loss gets spent in a fixed order:

1. First, it cancels capital gains, dollar for dollar, in the same year. Gains from anything, index funds included.
2. Then up to $3,000 of what's left comes off your ordinary income.
3. Whatever remains carries forward to next year, forever, and runs the same steps again.

Gavin has no gains to cancel. So his $37,500 comes back at $3,000 a year, saving him about $720 in actual tax annually. The last dollar lands on his 2039 return. One decent gain would wipe out the whole balance at once.

Two silver linings. His loss is short-term (he held the shares eleven months), which cancels short-term gains first, the kind taxed like salary. And this is the loss bank, just filled the hard way. That letter built one on purpose, harvesting paper losses in good years to erase the tax on a big sale later. A dead startup fills it involuntarily. The balance sits there waiting for your next win: the next company's tender offer, an index fund sale in a good year. Just know two limits: you can't give a carryforward away, and it dies with you.

What if the company just shuts down instead?

Then there's no sale to mark the loss, so the calendar does it instead.

Stock that becomes completely worthless during a year counts as sold for $0 on December 31 of that year. No fire sale needed. The company dissolves, and Gavin's $100,000 becomes a $100,000 capital loss. It drains through the same pipe: gains first, then $3,000 a year. And no, the AMT bill doesn't budge. The AMT taxed the exercise, not the ending, and a shutdown repays none of it.

The trap is the word year. The IRS means completely worthless. A company that laid everyone off but still owns patents? Not there yet. A bankruptcy where shareholders might recover something? Not there yet. Claim too early and the loss gets disallowed. Claim too late and the right year's return is already filed. Look for the real signs: a dissolution, a liquidation that leaves nothing for common stock, a cap table wiped to zero. Congress knows this is a hard call, which is why this one deduction gets seven years to amend a return instead of the usual three.

What doesn't count: a stock down 95%, a company gone quiet, a secondary market still bidding anything above zero. Those wait for an actual sale.

Do I get the AMT back?

Slowly. This is the cruelest part.

The $100,500 became a minimum tax credit the moment he paid it. AMT on an ISO exercise is really a loan to the IRS. It comes back a slice at a time: each year, Gavin gets back the gap between his two tax calculations. On his salary, that's about $8,700 a year. The pace is set by his paycheck, not by the size of the credit. Call it twelve years to collect a bill he paid in one April.

Selling the shares usually speeds this up. Not this time, and here's why. His shares carry two purchase prices: $4 in the regular calculation, $20 in the AMT calculation (which already taxed the gain). Sell above both and a chunk of the credit comes back in a lump. Gavin sold at $2.50, below both. Both calculations show a loss, and both cap it at the same $3,000 a year. The gap between them doesn't move, so the credit keeps dripping at $8,700 as if the sale never happened.

If this sounds familiar, it's the dot-com story. Engineers who exercised in 2000 owed AMT on paper gains their shares never saw again, with nothing left to sell against the bill. Congress eventually made stranded credits refundable in 2008, eight years later. That relief expired in 2012 and never came back. The credit never expires. The waiting is the cost.

Can I still get out of the AMT?

Yes, if the crash happened in the same calendar year you exercised. Gavin's window was open for nine months of 2026. It closed on December 31.

The AMT only counts an exercise if you still hold the shares at the end of that calendar year. Sell to a real buyer before then, at any price, and the AMT bill never exists. Run Gavin's deal both ways:

Ten weeks moved $100,500. Nobody gets to pick an acquisition's closing date, but the date was never the real lever. Any sale in 2026 would have worked. A secondary buyer at a painful price. The company buying the shares back. A sale the week the term sheet died. When your stock craters in the same year you exercised, selling before December 31 isn't tax-loss harvesting. It's deleting the AMT bill.

This is why the AMT letter says exercise in January: you get eleven months to watch before the year locks in. The honest caveat: a collapsing private company rarely has a buyer at any price, and a worthless certificate you keep is not a sale. The escape hatch is real. It just needs a door.

So what should I actually do?

Before exercising, size the loss, not the win. Exercising can write two checks that don't come back if the company dies: the strike and the AMT. One is refunded at $3,000 a year, the other at $8,700. Exercise only what you could watch go to zero, inside your AMT-free limit where you can.

The year the stock craters, check the calendar first. If the crash and the exercise land in the same calendar year, a sale by December 31 erases the AMT entirely. That's a deadline, not a strategy.

The year the company dies, claim it. Worthless stock is deducted in the year it became worthless, not the year you got around to it. The seven-year amendment window is the backstop, not the plan.

Every year after, keep the ledgers running. The capital loss rides Schedule D. The AMT credit rides Form 8801, even in years it returns nothing. Both run on your paperwork, not the IRS's memory. Lose the Form 6251 from the exercise year and you lose the proof of what you're owed.

The code taxes wins at full speed and repays losses through a $3,000 valve. You can't widen the valve. You can make sure the next gain lands on top of the loss, and that nothing you're owed leaks out while you wait.

Quick refresher

• Strike price. The fixed price your option grant lets you pay per share, no matter what the shares are worth later.
• ISO vs. NSO. Two kinds of stock options. ISOs get special treatment: no regular tax at exercise, but the AMT may apply. NSOs are taxed as wages the day you exercise.
• AMT (Alternative Minimum Tax). A parallel tax calculation that counts some income the regular one ignores, including the paper gain on an ISO exercise. You pay whichever calculation is higher.
• Capital loss carryforward. A loss your return couldn't use this year. It rolls into next year, and the next, until gains or the $3,000 allowance use it up.