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Tax implications of exercising ISOs and using proceeds to exercise more ISOs
That is a weird one.  Typically one never needs to layout cash to exercise an option.  One would only choose to use option 1, if one is seeking to buy the options.  This would occur if an employee was leaving a company, would no longer be eligible for the ISO (and thereby forfeit any option grant), and does not want to exercise the options.   However, what is not weird is the way income tax works, you are taxed on your income in the US.   I assume you are talking about the US here. So if you exercise 10K shares, if under either option, you will be taxed on the profit from those share.   Profit = (actual price - strike price) * shares - fees