"If you exercised ISOs in 2020 but didn't sell the stock in 2020." What's the difference between "exercise" and "sell"?

When you have Incentive Stock Options (ISOs) you have the option to buy company stock at a predetermined price.  When you exercise some or all of the options, you actually buy the stock.  For instance, lets say you have ISOs that allow you to buy 500 shares of XYZ stock for $5 per share.  XYZ stock is trading at $100 per share.  You then exercise your option, and buy 500 shares for a total cost of $2,500. If you exercise and hold, you own $50,000 of stock with a cost basis of $2,500.  If you buy in 2020 and hold into 2021, you don't have any ordinary income or capital gain, but you do have an AMT adjustment.

If you hold the stock for at least one year and one day before selling, you have a long term capital gain.  If you sell prior to that, you have ordinary income.

A popular strategy when exercising ISOs is a cashless exercise, where enough shares are sold at the same time as exercise to pay for the stock.  Another popular transaction is an exercise and sale.  You exercise the options and immediately sell.  Taxes are withheld and you get the remaining cash.

For more information, see:  Incentive Stock Options