Exercising ISO via non-recourse loan: taxation?

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    I am a startup employee who was granted a sizable amount of stock options during my tenure at the company.

    Over the years, I periodically exercised my vested options and became very familiar with the mechanics of (sadly) writing checks to the company and to the IRS for AMT, hoping to eventually recoup the generated AMT credits. Luckily, I also engaged in some secondary transactions, so I was able to at least recoup my initial expenses, and I’m hoping that in the end I will even see a mild profit.

    However, my most recent grant has a very high exercise price (due to the company valuation increasing), and I don’t feel comfortable exercising those options at a such large cost per share, it’s not worth the risk at this point.

    For this reason, I am considering engaging with one of the many companies who offer liquidity to cover exercise costs and AMT. This naturally comes at a very steep cost of 50% (or more) the proceeds but, considering I own many more shares “free and clear”, it’s fine with me at this point.

    This company would offer me a non-recourse advance check to cover the exercise expenses, and my questions are:

    – Is receiving the advance a taxable event during the year it is received? Should I report it to the IRS?

    – How will the advance be reported in the year the startup sells? My understanding is that I will send the 50% profit cut to the company and then I’ll increase the cost basis of my shares by that much so I just get to pay taxes on my portion of the proceeds, but what about the loan amount? How and where should one report that?


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