Martin Corporation granted an incentive stock option to employee Caroline on January 1,2012.The option price was $150,and the FMV of the Martin stock was also $150 on the grant date.The option allowed Caroline to purchase 160 shares of Martin stock.Caroline exercised the option on August 1,2014 when the stock's FMV was $250.Unless otherwise stated,assume Caroline is a qualifying employee.If Caroline sells the stock on September 5,2015 for $350 per share,she must recognize (ignore alternative minimum tax)
A)0)No gain or loss is recognized at exercise or sale with incentive stock options.
B)long-term capital gain of $16,000 in 2015.
C)ordinary income of $16,000 on the exercise date and a long-term capital gain of $16,000 in 2015.
D)long-term capital gain of $32,000 in 2015.

Question

Quizplus · Accepted Answer

When exercising an incentive stock option, there is no taxable income recognized. Caroline's basis in the stock will be $150 per share. Therefore, when she sells the stock for $350 per share, she will have a long-term capital gain of $200 per share ($350 - $150). Since she held the stock for over a year before selling it, the gain will be a long-term capital gain. Since she sold the stock in 2015, the entire gain of $32,000 will be reported on her 2015 tax return as a long-term capital gain.

Martin Corporation Granted an Incentive Stock Option to Employee Caroline