Honestly, I think the best answer is just "Because the tax code says so". It really doesn't make sense, you should be taxed on the sale of stocks, not the purchase, but the tax code as it currently stands doesn't work that way.

Because they're not worthless, they're just not liquid.

I wish one could just give a fraction of your stock equal to your marginal tax rate to the IRS, perhaps plus a small fee.

This is maybe rare, but there's at least 1 late-stage startup that gives RSUs and allows you to do this in practice. Where my friend works, they give you the option to either pay your own taxes when your RSUs vest, or they will purchase an amount of RSUs from you to cover your tax bill. Seems like a really good deal for the employees. I don't know if this can translate to options in any way, I'm only familiar with RSUs.

The IRS wants to be paid in cash, not illiquid stock.

Right, and they also want to tax income, not accumulation of untradeable shares. They seem to want to treat it as income for purposes of determining tax liability, but not income for purposes of satisfying the very same tax liability. That's like trying to have your cake and eat it too.

Reminds me of California's debt crisis and "Hey! How dare you turn down state IOUs as payment? These are every bit as good as cash. ... Wait, you want to pay your state tax bill with state IOUs? Get that crap away from us!"

The rules are definitely not fair but that’s beside the point.

Beside the point of the GGGP's wish that tax liability on an unsaleable asset could be satisfied in kind?

I thought GGGP’s post was to propose a solution that worked under current rules.

Yeah, it would be great also if supermarkets would accept a fraction of the stock, in return for baby food. But I'm not sure why they would be willing to do that.

Sufficiently advanced illiquidity is indistinguishable from worthlessness.

But by the time they become liquid (if they ever do), they could be approximately worthless, or worth much less than they were when you paid tax.

an unintended consequence of the Alternative Minimum Tax

This is only an AMT issue when it comes to Incentive Stock Options which nominally don't have this issue.

For regular (Non-qualified) options, current value - strike is considered ordinary income when you exercise.