Under a nonqualified stock option (NQSO) plan that is granted to Damon on March 15, 2017, he may purchase 200 shares of stock from his employer at $15 per share.At that date, the option does not have a readily ascertainable fair market value.Eight months later on the date of exercise the fair market value of the stock is $20.On December 1, 2019, Damon sells 100 shares for $24 each.Which of the following would be the result of these transactions on the date of exercise and the date of sale?
A)Ordinary income of $1,000 and a long-term capital gain of $400.
B)Ordinary income of $1,200 and a long-term capital gain of $300.
C)Ordinary income of $2,400 and a long-term capital gain of $0.
D)Ordinary income of $1,000 and a short-term capital gain of $400.
E)None of these.

Question

Quizplus · Accepted Answer

On the date of exercise, Damon recognizes ordinary income equal to the difference between the fair market value of the stock at the time of exercise ($20 per share) and the exercise price ($15 per share). Since he exercises options for 200 shares, the total ordinary income is 200 shares * ($20 - $15) = $1,000. When Damon sells 100 shares for $24 each on December 1, 2019, more than a year after the exercise date, the gain is considered long-term. The capital gain is calculated as the difference between the selling price ($24 per share) and the fair market value at the time of exercise ($20 per share), which was the basis for the shares. Therefore, the capital gain is 100 shares * ($24 - $20) = $400.

Under a Nonqualified Stock Option (NQSO) Plan That Is Granted