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 1,2015 when the stock's FMV was $250.Unless otherwise stated,assume Caroline is a qualifying employee.If Caroline sells the stock on September 5,2016 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 2016.
C)ordinary income of $16,000 on the exercise date and a long-term capital gain of $16,000 in 2016.
D)long-term capital gain of $32,000 in 2016.

Question

Quizplus · Accepted Answer

With an Incentive Stock Option (ISO), no gain or loss is recognized at exercise or sale if the options are held for at least two years from the grant date and one year from the exercise date (the holding period). Since Caroline exercised the option on August 1, 2015, and sold the stock on September 5, 2016, the holding period requirements are met.

Caroline’s basis in the stock is $150 per share (the option price), and she sold the stock for $350 per share. Therefore, Caroline has a long-term capital gain of $200 per share ($350 sale price - $150 basis). Since Caroline purchased 160 shares, her total long-term capital gain is $32,000 ($200 gain per share x 160 shares).

Martin Corporation Granted an Incentive Stock Option to Employee Caroline