What changed for equity compensation in 2026

Most tax years bring inflation adjustments and nothing else. 2026 is not one of those years. The legislation signed on 4 July 2025 rewrote two provisions that sit directly under anyone holding startup equity, and the two move in opposite directions: one makes exercising options at a high income noticeably more expensive, while the other is the largest expansion of the founder-stock exclusion since it was created.

Both are easy to get wrong in the same way. The published summaries lead with the new numbers, and the new numbers do not apply to everyone. Whether they apply to you turns on your income in one case and on the date printed on your stock certificate in the other.

The AMT exemption now vanishes twice as fast

Alternative minimum tax works by ignoring some of what the ordinary system allows, then granting a flat exemption against the result. For 2026 that exemption is $90,100 for a single filer and $140,200 for joint filers. The exemption is not available to everyone, though: above a threshold it phases out, and it is the speed of that phaseout that changed.

Through 2025, the exemption fell by 25 cents for every dollar of alternative minimum taxable income above the threshold. From 2026 it falls by 50 cents. The thresholds were also reset, to $500,000 for single filers and $1,000,000 for joint filers.

The practical consequence is a band of income where the effective marginal rate is much higher than the headline 26% or 28%. Every extra dollar of AMTI in the phaseout range both gets taxed and destroys fifty cents of exemption, which is itself taxed. At the 28% rate that is an effective 42% on income inside the band — and exercising incentive stock options is precisely the thing that pushes people into it.

If you exercised in 2025 and are planning a similar exercise now, the arithmetic is not the same. A spread that cost you very little last year can cost a great deal this year purely because the exemption erodes faster behind it.

Founder stock: two regimes split by a single Friday

Section 1202 lets you exclude gain on qualified small business stock from federal income tax entirely. It has always been an all-or-nothing provision with a five-year holding requirement, a $10,000,000 per-shareholder cap, and a requirement that the company’s gross assets never exceeded $50,000,000 when the stock was issued.

For stock issued after 4 July 2025, all three of those changed. The holding requirement became a ladder: 50% of the gain at three years, 75% at four, and 100% at five. The cap rose to $15,000,000, indexed for inflation from 2027. The asset test rose to $75,000,000, likewise indexed.

What did not change is anything about stock issued on or before that date. It is governed entirely by the old rules. At four years it excludes nothing at all — not 75%. This is the single most consequential fact about §1202 today, and it is the one most often misread, because almost every summary leads with the new ladder without saying who is standing on it.

There is a sting in the new ladder that deserves attention. The portion of gain the percentage does not exclude is not ordinary long-term capital gain. It is treated as 28% rate gain, and it never receives the 0% capital gains band. For a seller with modest income, qualifying at three years can genuinely cost more than not qualifying at all.

The AMT preference on excluded gain was narrowed, not revived

This one is worth stating carefully, because the statutory change reads backwards at first glance. Historically, 7% of gain excluded under §1202 was an alternative minimum tax preference item. A carve-out inside §1202 itself disapplied it for fully excluded stock, and that carve-out was deleted in 2025.

Deleting a carve-out normally means the rule it disapplied comes back. Here it does not. The same limitation was moved into §57(a)(7) and restated as a date: the preference now applies only to stock acquired on or before 28 September 2010. The carve-out disappeared because it had become redundant, not because the preference was restored.

For anyone holding startup equity today, the practical answer is that there is no alternative minimum tax consequence to excluding QSBS gain. If you read otherwise, check which of the two changes the source is describing.

What did not change at all

It is worth being explicit about the absences, because a year with headline changes tends to make people assume everything moved.

• Restricted stock units are taxed at vesting as ordinary income, withheld at the flat 22% supplemental rate until $1,000,000 of supplemental wages and 37% above it. The gap between that rate and a high earner’s real rate is exactly where it was.
• Non-qualified options still produce ordinary income on the spread at exercise, with Social Security and Medicare on top.
• The incentive stock option holding periods are untouched: two years from grant and one from exercise, or the disposition is disqualifying.
• Employee stock purchase plans under §423 are unchanged, including the lookback and the peculiar rule that measures the ordinary income component on the grant-date price.
• The 83(b) election still has a thirty-day deadline that cannot be extended for any reason.
• The minimum tax credit still comes back only to the extent regular tax exceeds tentative minimum tax, which for most people is a few thousand dollars a year.

What to actually check

Three questions cover almost everyone affected.

1. If you are planning an ISO exercise and your income is near or above $500,000 single or $1,000,000 joint, re-run the AMT rather than assuming last year’s answer holds. The faster phaseout does its damage precisely in that band.
2. If you hold founder stock or early-employee shares, find the issue date. Before or after 4 July 2025 decides which regime applies, and the difference can be seven figures on a large position.
3. If your stock is under the new ladder and an exit is close, check whether the three-year tier is actually worth taking or whether waiting for a higher tier is better. The 28% rate on the unexcluded portion means the partial tiers are worth less than the percentages suggest.

None of this is a substitute for looking at your own Form 6251 and your own stock records. The dates and figures above are the general rules; whether your shares meet the other §1202 conditions — an active qualified trade, original issuance, the asset test at the moment of issue — is a question about your company that only your company can answer.

Questions

Sources

Everything asserted above traces to one of these. We cite the statute, the regulation, or the IRS directly — never another commentary site.

• P.L. 119-21 (OBBBA) §70107 — alternative minimum tax exemption and phaseout
• P.L. 119-21 (OBBBA) §70431 — qualified small business stock
• IRC §55 — alternative minimum tax imposed
• IRC §1202 — partial exclusion for gain from certain small business stock
• IRC §57(a)(7) — the 7% AMT preference, now limited to pre-28 September 2010 stock
• Rev. Proc. 2025-32 — 2026 inflation-adjusted figures

Related calculators

• ISO AMT CalculatorExercising an incentive stock option produces no regular taxable income and can still produce a very large tax bill.
• QSBS Eligibility & Exclusion CalculatorSection 1202 can exclude millions of dollars of gain from federal tax entirely.
• AMT Credit Recovery CalculatorPaying alternative minimum tax on an ISO exercise creates a minimum tax credit that never expires.