Six years ago, Linus Corporation granted Pauline an incentive stock option (ISO) to purchase 5,000 shares of Linus stock for $13 per share. On date of grant, the market price was $11 per share. Last year, Pauline exercised the ISO when the market price was $47 per share. This year, she sold the stock for $40 per share. Compute Pauline's gain or loss recognized on sale.

Question

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Pauline's gain on the sale of the stock is $135,000. This is calculated as follows:Sale price: $40 per shareNumber of shares: 5,000Total sale proceeds: $200,000Cost basis: $13 per shareNumber of shares: 5,000Total cost basis: $65,000Gain: $200,000 - $65,000 = $135,000

Six Years Ago, Linus Corporation Granted Pauline an Incentive Stock