You pay the strike price in cash and you get the shares. Your &quot;basis&quot; in the shares is the strike price (what you invested).<p>You base your AMT tax calculation on the difference between the fair market value and the strike price (that&#x27;s the &quot;phantom income&quot;).<p>When you sell the shares, your realized capital gains is based on the original basis and you may have AMT basis that&#x27;s different.<p>If you exercise and immediately sell, AMT doesn&#x27;t factor in.<p>Concretely (and picking semi-random numbers): If your strike price is $10&#x2F;sh, the FMV is $25&#x2F;share, and you have options on 1000 shares, you&#x27;d pay $10K to exercise, get 1000 shares, and have $15K in AMT income to consider.<p>If those shares later soared to $40 and you sold, you&#x27;d have a capital gains of ~$30K ($40K proceeds minus $10K basis minus commissions and fees).<p>If those shares instead crashed to $0, you&#x27;d have possibly paid AMT on the phantom income and you definitely lost the $10K in cash.