The three-month rule
Incentive stock options get their favorable tax treatment only if you exercise while you are an employee, or within three months after your employment ends. That window is longer in two cases: one year if you leave because of a permanent and total disability, and no statutory limit for options exercised by your estate after death.
Most companies set their plan's post-termination exercise period to match: 90 days. Two things follow from that. Unvested options are usually forfeited on your last day. And vested options that are not exercised by the plan's deadline usually expire. Your grant agreement controls the details, so read it before you give notice, not after.
What happens if you exercise after 90 days
Some companies allow a longer post-termination window, sometimes years. That can be valuable, but it changes the tax. An ISO exercised more than three months after employment ends no longer qualifies as an ISO. It is taxed as a non-qualified stock option: the spread between the exercise price and the market value at exercise is ordinary income in the year you exercise.
The same can happen when a company extends the window for departing employees. A change to an outstanding option can be treated as a new grant, which can cost the ISO status. If your company offers an extension, ask whether the options will remain ISOs.
Severance and consulting arrangements matter here too. The three-month clock generally runs from the end of employment, and a consulting relationship after you leave typically does not count as employment for ISO purposes. Pay continuation does not necessarily mean you are still an employee. Confirm your employment end date with HR in writing.
Your four choices for vested ISOs
1. Exercise and hold
You pay the exercise price and keep the shares. There is no regular income tax at exercise, but the spread counts toward the alternative minimum tax if you still hold the shares at year-end. If you then hold the shares at least two years from the grant date and one year from exercise, the eventual gain can qualify for long-term capital gains treatment.
2. Exercise and sell in the same year
Selling before the holding periods are met is a disqualifying disposition. The spread at exercise becomes ordinary income, much like a non-qualified option. In exchange, a same-year sale generally removes the AMT exposure from that exercise and gives you cash and diversification immediately.
3. Exercise some, let some go
You do not have to treat every grant the same way. Grants with a low exercise price relative to today's value may be worth exercising. Grants close to or below water may not justify the cash and risk.
4. Let them expire
Sometimes the right answer is to walk away from options whose cost, tax, and risk outweigh their realistic value. That is especially true at a private company where the shares cannot be sold.
The AMT question
A large ISO exercise in your final year can create an AMT bill even though you received no cash. AMT paid because of an ISO exercise generally creates a minimum tax credit that can be used in later years, but recovering it can take time, and it does not help with the cash due in April.
Two planning points follow. First, a year with lower other income, such as a partial final year, can leave more room before AMT applies. Second, splitting an exercise across tax years can help, but only if the deadline allows. If your last day is in early autumn, the 90-day window may cross into January, which can let part of the exercise land in a new tax year. A multi-year tax projection shows how much fits in each year.
Paying for the exercise
Exercising requires cash for the exercise price, and possibly for tax. Common sources are savings, a cashless exercise that sells enough shares to cover the cost (which makes it a disqualifying disposition for those shares), or borrowing.
At a private company the question is harder, because there is usually no market to sell into and no way to cover the cost with shares. Financing an exercise adds leverage to a concentrated, illiquid position. It may make sense in some situations, and it can go badly in others. Model the downside before committing.
Hypothetical example: Meet "Dana," a director at a public company who plans to leave in October. She holds three vested ISO grants with different exercise prices. Before giving notice, she maps her options: the grant with the lowest exercise price could be exercised and held, the middle grant could be exercised and sold in January, and the newest grant, close to its exercise price, could be allowed to expire. The point of the exercise is the sequence. The numbers depend entirely on her situation.
What to do before your last day
- Pull every grant agreement. Note vesting status, exercise prices, expiration dates, and the post-termination window for each grant.
- Confirm your employment end date in writing. That date starts the clock, not your last day in the office.
- Check for vesting events you could reach. A short delay in your departure date can sometimes capture another vest.
- Run the AMT and cash numbers. Know what each choice costs before choosing.
- Look at the rest of your equity. RSUs, NQSOs, and ESPP shares have their own departure rules. See our post on NQSO exercise methods.
- Tell your CPA. An ISO exercise generates Form 3921, which your CPA needs for the AMT calculation and for tracking your cost basis.
Common mistakes
- Assuming vested options last until their ten-year expiration date after you leave.
- Exercising on day 95 and being surprised by ordinary income.
- Treating a consulting agreement as continued employment.
- Exercising and holding without a plan for the AMT bill.
- Letting valuable options lapse because the decision was put off.
Important: Skyview Financial Group does not provide legal advice or prepare tax returns. Your grant agreement and plan document control, and tax treatment depends on your specific facts. We coordinate the planning with your CPA and, where needed, your attorney.
Related: our equity compensation planning and the tax basics in ISO vs. NQSO: how each is taxed.
Disclosure: Skyview Financial Group, LLC is an SEC-registered investment adviser (CRD #310581). This content is educational only and is not individualized tax, legal, or investment advice. Skyview Financial Group does not prepare or file tax returns. Figures and rules cited are current as of October 2026 and subject to change; please consult your CPA and, where applicable, legal counsel. Examples are hypothetical and do not reflect any specific client.