Do I owe tax on stock options if my private company is bought out before I exercise them?

Yes, tax can become owing even though you never formally exercised your options in the ordinary sense, depending on how the buyout of your private company is actually structured. If your unexercised options are simply cashed out as part of the deal, the buyer pays you an amount reflecting the value of the options instead of letting you exercise and then sell shares, that cash-out payment is generally treated as employment income at that point, potentially still eligible for the stock option deduction if the usual conditions are otherwise met.

Other buyout structures work differently: your options might instead be converted into options or shares of the acquiring company, which can defer the tax consequence further depending on how that conversion is handled, or you might be given the opportunity to exercise as part of the transaction before the sale closes. Which of these paths applies depends entirely on the specific deal mechanics your company and the buyer agree to, not on a single universal rule for what happens to options in every acquisition.

Because the tax result can differ significantly depending on how the buyout treats your specific options, reviewing the actual deal terms as they apply to your options, rather than assuming a buyout always triggers, or always defers, tax, is essential once a transaction is announced.