long term capital gain on ISO stock purchased with much AMT credit now

[ken-w]

Two years ago I wrote a check to IRS for AMT because I exercised my incentive stock options when I left a startup.  AMT was due for that tax year, because the private company's fair market stock price exceeds substantially compared to the exercise price.   AMT was based on the supposed profit (Number of shares * (fair market price - exercise price).

For the next two tax returns I am now carrying substantial amount of 'prior year' AMT tax credit.  It is reducing slowly but it is now about 90% of what I paid two years ago.

Today I am free to sell the shares at even higher price.    The question I have is since I paid AMT based on the company valuation two years ago, am I allowed now to use the price based on two years ago (instead of my exercise price) to calculate capital gain.   If I use original exercise price, I would end up paying tax twice for a good portion of the capital gain [number of shares X (two years ago price - exercise)].   Otherwise, how would I get back the so-called substantial amount of 'prior year AMT tax credit/carryforward'

What I notice is AMT tax credit is lowered when I exercise ISO grants (at a new company).  Because the new company valuation is not as high, the new ISO profits does not compare to prior company.  If I never work for another company with ISO again, is it the case that I would never get back all my AMT tax credit?  

If this requires a face to face session with an expert, I would like some suggestions on 1) where to find such an expert 2) what type of qualification I should look for?  Do I need a lawyer?  A CPA specializing in this area?     I live in Queens, NYC.

[TomYoung]

"The question I have is since I paid AMT based on the company valuation two years ago, am I allowed now to use the price based on two years ago (instead of my exercise price) to calculate capital gain."

No, not if you're referring to your "regular tax" calculation of gain.  With a Qualified Disposition you use the "out of pocket" purchase price of the stock you exercised and did not sell for regular income tax purposes.  That's really the whole advantage of selling stock acquired via an ISO: your gain is taxed at low long term gain rates when you sell instead of having the "built in" gain taxed at ordinary tax rates when you exercise, as with an NQSO.

For AMT purposes you'll use the higher "fair market value" basis, resulting in a much lower capital gain.  Based on the mechanics of the AMT vs. regular tax comparison you might get some or all of the AMT credit.

As you know, each year you're supposed to do two tax calculations; one using regular tax rules and another using the AMT rules.  Then you pay the higher of the two.  So you can't think of the AMT "penalty" as purely a "timing difference", i.e., I'll pay a boatload of tax when I exercise and hold but I'll get it all back when I sell."  That would sort of defeat the purpose of the AMT.

The AMT rules have changed quite a bit with the 2018 tax law changes and I can't claim to be an expert here.  I think talking to a CPA who deals with high net worth individuals would be the best way to get a good understanding of what's going on.

[ken-w]

Thanks for the reply.  Can you or anyone explain or understand how the issue of double taxation is handled?

Say I exercised options in 2017 with valuation of $10.  Exercise price was $1.  So I paid AMT for $9 profit.

Now in 2020, the stock is worth $20.  If I pay $19 profit, I will be paying for initial $9 gain twice.  That does not sound right even if may be legal.

[TomYoung]

The AMT on ISO stock is a refundable credit so you may get some or all of that AMT tax back when you sell the stock.  The actual mechanics of the calculation of the credit are complicated, hence that "some" qualifier.