On March 1, 2016, Bema Inc. issued 600 shares of its publicly traded stock as compensation to its employee, Ms. McPhee. On date of issuance, the stock's fair market value was $12,000. Under the terms of her employment contract, Ms. McPhee couldn't dispose of the stock before July 1, 2020, and if she terminated her employment with Bema before that date, she had to forfeit the stock back to Bema. Ms. McPhee made a timely election in 2016 to accelerate income recognition with respect to the 600 shares of restricted stock. On July 1, 2020, Ms. McPhee, who was still employed by Bema, sold all 600 shares for $26,000. What are the 2020 tax consequences to Ms. McPhee?

Question

Quizplus · Accepted Answer

Ms. McPhee recognizes zero ordinary income because she elected to accelerate income recognition to 2016, when she received the stock. Therefore, in 2020, she only recognizes a capital gain, which is the difference between the sale price ($26,000) and the fair market value at the time of income recognition ($12,000), resulting in a $14,000 capital gain.