Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share)at the time she started working, when the stock price was $6 per share.When the share price was $15 per share, she exercised all of her options.Eighteen months later she sold all of the shares for $20 per share.How much gain will Maren recognize on the sale and how much tax will she pay, assuming her marginal tax rate is 35 percent?
A)$0 gain and $0 tax.
B)$500 gain and $75 tax.
C)$500 gain and $175 tax.
D)$1,200 gain and $180 tax.

Question

Quizplus · Accepted Answer

Maren's gain is calculated as follows: She bought 100 shares (10 NQOs x 10 shares each) at $8 per share, totaling $800. She sold them for $20 per share, totaling $2,000. The gain is $2,000 - $800 = $1,200. However, the exercise of the options when the stock was $15 per share results in ordinary income of ($15 - $8) x 100 = $700, taxed at 35%, which is $245. The remaining gain of $500 ($1,200 total gain - $700 ordinary income) is taxed as a long-term capital gain at 15%, resulting in $75 tax.

Maren Received 10 NQOs (Each Option Gives Her the Right