At the time you exercise the option, the IRS asks for the difference between the price you paid to exercise, and the estimated value of a share of the stock (ba

At the time you exercise the option, the IRS asks for the difference between the price you paid to exercise, and the estimated value of a share of the stock (based on the company's latest 409a valuation). If those numbers are different, you owe tax on the amount of the difference. The IRS doesn't care whether you actually have the ability to realize the gain by selling stock; they just care that you paid $X and now own something worth $(X + N) where N is positive. This is a massive issue in this era of companies which never allow their stock to freely circulate, and mostly is based on the previous eras in which a startup that granted options would actually go public at some point and allow the holders of the options to sell their stock for money.