In 2014, Hu Corporation granted incentive stock options to Trevor to buy 5,000 shares of Hu stock at $20 per share exercisable for six years.At the date of grant, the stock was selling for $19 per share.In 2017, Trevor exercises the options when the market price was $38 per share.Trevor sells the stock in 2019 for $42 per share.How much income or gain does Trevor recognize and in which year?

Question

Quizplus · Accepted Answer

Trevor recognizes a $110,000 capital gain in 2019 only because the income from exercising incentive stock options (ISOs) is not taxable at the time of exercise. The gain is calculated based on the difference between the sale price ($42 per share) and the exercise price ($20 per share) for the total shares sold (5,000 shares), resulting in a capital gain when the stock is sold in 2019.

In 2014, Hu Corporation Granted Incentive Stock Options to Trevor