Question

Question 10 of 15 On March 14, 2018, Mckensie exercised an incentive stock option (SO) granted to her her to purchase 1,000 shares of stock for $10 per share. When she exercised share. She sold the stock at a gain six months later, when the stock transaction, how much does Mckensie report on her 2018 return as short-term her option, the stock was trading at $15 pe was trading at $21 per share. As a resuit of tis capital gain income? $5,000 $6,000 $10,000 Mark for follow up Question 11 of 15. On January 15, 2018, Sebastian exercised an incentive stock option (SO) granted to him by his employer. His option enabled him to purchase 1,000 shares of stock for $10 per share. When he exercised his option, the stock was trading at $15 per Sebastian report as ordinary income from compensation as a result of this transaction? share. He sold the stock at a gain six months later, when the stock was trading at $22 per share. How much does $5,000 $7,000 $10,000 Mark for follow up

Answer 1

Explanation

General objective of giving ISO is that to hold the stock for longer period so that optimal tax benefit can be achieved through long term capital gain.

If the stock is sold in short term. the difference between the fair value and exercise price is taxable as compensation expenses and difference between the Sale Price and Fair Value is taxable as short term capital gain.

Question 1 : the answer is Option C - $6000

Short Term Capital Gain = 1000 x (21-15) = $ 6000

Compensation Expense = 1000 x (15-10) = $5000

Question 2 : the answer is Option C - $7000

Short Term Capital Gain = 1000 x (22-15) = $ 7000

Compensation Expense = 1000 x (15-10) = $5000