Updated July 28, 2026. Quick answer: Only $100,000 of ISOs — measured by grant-date value, not current value — can first become exercisable in any calendar year. Anything above that is treated as a non-qualified option, taxed as ordinary income at exercise.
How the measurement actually works
The limit uses grant-date fair market value and the year the options first become exercisable — not the year granted and not the year you exercise. A single large grant with a four-year vest is usually fine; a stack of grants that all begin vesting in the same year is where the limit bites.
| What it uses | What people assume |
|---|---|
| Grant-date value | Current value |
| Year first exercisable | Year granted, or year exercised |
| All grants aggregated | Per grant |
What happens to the excess
It is not forfeited. It is simply treated as a non-qualified option: ordinary income on the spread at exercise, withholding applies, and no AMT preference. For some people that is actually the better outcome — NSO treatment is worse on rate but far more predictable, and it does not create phantom income.
Acceleration on a change of control can push years of vesting into one year and blow through the limit in a single event. If your plan accelerates, the ISO/NSO split you were counting on may not survive it.
Sources
IRC §422(d); Treas. Reg. §1.422-4.
This states what the cited authority says. It is not tax advice; AMT in particular is computed across your whole return and cannot be resolved from one page.