It IS entirely on the exercise of the option. Granting and vesting of ISO's are not taxable events. Exercise of ISO's is taxable under the AMT rules, but only

It IS entirely on the exercise of the option. Granting and vesting of ISO's are not taxable events. Exercise of ISO's is taxable under the AMT rules, but only if you are above the AMT threshold (admittedly, this is true for a lot of people) If you're not hitting the AMT threshold, then you only pay tax when you sell the resulting shares.