In 2009, Corporation D granted a non-qualified stock option to employee Z, which entitled Z to purchase 500 shares of D stock at $100 per share at any time until 2014.Upon date of the option grant, D stock was selling at $90 per share.In 2012, when the market price of D stock had increased to $145 per share, Z exercised his option.Based on these facts, Z must recognize

Question

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When Z exercised the option in 2012 and purchased the 500 shares of D stock at the option price of $100 per share, the fair market value of the shares was $145 per share. Therefore, Z has realized a taxable gain of $45 per share ($145 - $100).

The total realized gain from exercising the option is $22,500 ($45 gain per share x 500 shares). This amount is taxable as ordinary income in the year of exercise, which is 2012.

Option grants do not result in taxable income to the employee at the time of grant. The taxable event occurs when the employee exercises the option and realizes a gain. A non-qualified stock option does not qualify for special tax treatment, so any gain realized upon exercise is taxed as ordinary income.

In 2009, Corporation D Granted a Non-Qualified Stock Option to Employee