Six years ago, HOPCO granted Lin Sing an incentive stock option (ISO) to purchase 1,000 shares of HOPCO stock for $55 per share. On date of grant, the market price was $50 per share. This year, Lin Sing exercised the ISO when the market price was $64 per share. How much ordinary income does she recognize because of the exercise?

Question

Quizplus · Accepted Answer

The exercise price of the ISO is $55 per share, and the market price when Lin Sing exercised the ISO was $64 per share. Therefore, the spread between the exercise price and the market price is $9 per share. Since Lin Sing exercised 1,000 shares, the total spread is $9,000. However, because this is an ISO, the spread is not taxed as ordinary income. Therefore, Lin Sing recognizes $0 of ordinary income because of the exercise.

Six Years Ago, HOPCO Granted Lin Sing an Incentive Stock