The loss on stock options I exercised is stuck at $3,000 a year. Four ways to free it before December 31.

A senior engineer leaves a public company in January with 20,000 vested nonqualified options at a $4 strike and 90 days to decide. The stock is $24, so in February he wires $80,000, exercises everything, and holds, because selling the same morning feels like paying tax for nothing. By November the stock is $9. The loss on stock options I exercised is the question that follows, and the call opens with some version of: I paid tax on $400,000 I never got. He did. The spread was wages the day he exercised, the $300,000 decline since is a capital loss, and the two never meet unless he arranges it before December 31.

Under §83(a) the spread between the strike price and the market price on the exercise date is compensation at ordinary rates, reported in box 1 of the W-2 and again in box 12 with code V. It left as cash: $137,500 of federal tax on a $400,000 spread for a single filer with $210,000 of other 2026 wages, plus $17,800 to Utah at the 4.45% rate S.B. 60 set retroactive to January 1, 2026. What comes back is a capital loss, and capital losses are rationed. It's the same asymmetry behind the RSU tax trap when the stock drops, and it stings more on options, because this holder also paid $80,000 of his own cash for the strike.

What matters is what the rationing actually covers. The $3,000 ceiling in §1211(b) applies to ordinary income only. Against capital gains there's no ceiling at all. Nobody holding a $300,000 loss should be budgeting $3,000 a year for 99 years. They should be finding gains.

This is the whole game, and it's a December decision. A $300,000 capital loss realized in a year with $300,000 of realized capital gains is used in full. Realized in a year with none, it releases $3,000. The gains don't have to come from company stock: an appreciated index fund, a second home, a crypto position, a rental closing. Anything producing capital gain in 2026 absorbs it. The classic match is a concentrated position somebody has refused to sell for years because of the tax bill, and this is the year that bill is free.

Two details. The short-term loss here nets against short-term gains first and then against long-term gains under §1222, so it reaches both and there's no wrong kind of gain to pair it with. And the $3,000 that does reach ordinary income also reduces net investment income, because Treas. Reg. §1.1411-4(f)(4) treats the excess loss allowed by §1211(b) as a properly allocable deduction. That's $114 at the 3.8% rate, and preparers leave it on the table.

Then the broker reports the sale and the loss disappears. For a compensatory option granted after 2013, Treas. Reg. §1.6045-1(m) forbids the broker from adding the taxed spread to basis, so box 1e of the Form 1099-B carries the $80,000 of strike price and nothing else. Against $180,000 of proceeds that prints a $100,000 short-term gain where there's a $300,000 loss: a $400,000 error on one line, worth $35,000 of federal tax on income that doesn't exist, plus the $1,050 the real loss should have saved. The fix is the one taxes when you exercise stock options walks through, reporting the true $480,000 basis on Form 8949 with adjustment code B. It's the most common error I correct in second-opinion reviews of equity returns.

Sell on December 15 and the wash sale rule is live, because §1091 reaches the 30 days before the sale, the sale date, and the 30 days after. Most people check whether they bought the stock back. What catches equity holders is everything else inside those 61 days: an ESPP purchase date, a dividend reinvestment, a buy in a spouse's account, a managed account nobody is watching. An ESPP purchase is a purchase, and one is enough.

An RSU vest inside the window is genuinely unsettled, and I'll say where I land. Section 1091(a) and Treas. Reg. §1.1091-1(f) define acquiring stock as acquiring it by purchase or by an exchange on which the entire amount of gain or loss is recognized. A vest is neither: no cash moves and nothing is exchanged. No ruling, regulation, or case addresses it, and brokers don't flag it on the 1099-B. I think the better reading is that a vest isn't a purchase. I also don't plan around being right, because the cost of being wrong is deferral and not loss: §1091(d) moves the disallowed amount into the basis of the replacement shares and §1223(3) tacks the old holding period on. So I set the sale at least 31 days clear of the vests on either side of it. On a monthly vesting schedule that's impossible, and the honest answer is to accept the deferral.

Two provisions help only private-company holders. If the stock becomes worthless, §165(g) treats it as sold on the last day of that tax year, which fixes the year and the holding period but leaves the loss capital. Section 1244 changes the character: on stock a domestic small business corporation issued for money or other property, an individual deducts up to $50,000 of the loss as ordinary, $100,000 on a joint return. Stock issued for services doesn't qualify, but a strike price is paid in money, which is the argument worth making on an exercised option. Above the cap, splitting the sale across two tax years buys two years of the limit.

The advice I disagree with most here is the one that sounds prudent: hold until it comes back. Holding is a fresh decision to own a single stock that has already fallen 62%, and the tax already paid is not a reason for it. That money is gone no matter what the stock does next. What's still live is $300,000 of loss and a deadline, and the spread between $1,050 and $71,400 turns on whether there are gains in the same calendar year.

The order I work it: size the loss against real basis, inventory every realizable gain in the household, check the vest and ESPP calendar against the 61-day window, then pick the sale date. That's an afternoon in November. It can't be done at all in February.