This happened to a lot of people in the Valley after the dot com bust. They exercised their options, triggering a tax liability, and then the shares tanked, leaving them with no money to pay off the liability. They could only deduct $3000/year. Lots of people were in a lot of trouble, but I remember hearing that finally the IRS made a change so that this wouldn't affect you anymore.
You should be able to deduct the loss, but I'm not sure how that plays with the tax owed, since the loss is a capital loss and you're paying tax on an object of specific value (not a capital gain). It might not simply cancel out.
stevewepay|10 years ago
jkarneges|10 years ago