Yes. Yes it is absurd. A lot of people have been screwed over by this situation. I think it's basically a bug in US tax law. The scenario is such an edge case

Yes. Yes it is absurd. A lot of people have been screwed over by this situation. I think it's basically a bug in US tax law. The scenario is such an edge case for most Americans. The other not-so-nice aspect of this is that it disproportionately affects people who aren't already relatively wealthy. Theoretically you can avoid this trap by exercising your options as soon as possible and locking yourself into long-term capital gains. But if you're joining a relatively established startup it may well be pretty expensive to immediately exercise your options. If you don't have, say, 100k lying around you have to wait until there's liquidity, thus opening yourself up to this risk.