An employer issues Johnny 2,000 stock options in recognition of a very good year. These particular options vest after 24 months from the date of issuance with an exercise price of $21.00 per share. After 24 months, these shares trade in the open market at $25.00 per share, and Johnny decides to exercise his 2,000 options, generating a gain of $8,000 (minus transaction fees). Which of the following statements regarding Johnny's tax situation pursuant to these gains is true?

Question

Quizplus · Accepted Answer

Johnny will have to pay taxes on the gain, but taxes will be paid at the capital gains rate. The gain from the exercise of the options is considered income, but the tax rate will be based on whether Johnny held the shares for more or less than a year. Since Johnny exercised the options and sold the shares after 24 months, the gain will be taxed at the long-term capital gains rate. This is typically a lower tax rate than the ordinary income tax rate.

An Employer Issues Johnny 2,000 Stock Options in Recognition of a Very