Cindy works for Sky Manufacturers Ltd., which is a public corporation. In 20x1 she was offered an option to purchase shares at $15 per share from her employer. The fair market value on that day was $17 per share. Cindy exercised her option in 20x3 and purchased 500 shares. The fair market value at that time was $21 per share. What is Cindy's tax treatment of this option on her 20x3 tax return?

Question

Quizplus · Accepted Answer

Cindy will have a taxable benefit equal to the difference between the fair market value at the time of exercise ($21) and the exercise price ($15), multiplied by the number of shares (500). Therefore, her taxable benefit is $3,000 (500 x ($21-$15)). Since she is not in the business of securities, she is not eligible for the security option deduction. Hence, choice C is correct.

Cindy Works for Sky Manufacturers Ltd