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Hi Judy,
Interesting speculation on ISOs. I remember a time when Long-Term Cap Gains rates were lower and it was more beneficial for people to hold their exercised shares.

Sadly, even in those more beneficial times, more than 85% of all ISO exercises were Same-Day-Sales, which effectively turn ISOs in NQSOs (Ordinary Income at exercises, taxed in year of exercises....but no withholding).

AMT was less of an issue then, mainly because stock options sizes were so much smaller (and AMT has barely been adjusted for inflation since 1969.) Even without the AMT risk people tended to exercise when they needed money.

If companies lose the potential tax deduction associated (currently they can expect 85-90% of all ISOs to result in a corporate tax deduction) with ISOs, i think we will see an almost immediate drop off in their use. Already companies state the lack of guaranteed tax deductions as one of the biggest drivers of reduced ISO usage.

Now, if both AMT and Cap Gains go away, you will certainly have some executives demanding these tax free options. In my experience nearly all ISOs held to a qualifying disposition are held by people who can live comfortably without the gains. This means one more separation between the "haves" and the "don't have as much's (that can't be a real word)."

I am not sure that the long term result of this will be positive.

Lastly, I can see many states who depend on ISO income (New York, California, Washington etc.) changing their tax codes so that ISOs are taxed at exercise, instead of at disposition. A couple states already do this, most notably Pennsylvania.

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