Yvonne exercises incentive stock options (ISOs)for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21,2016,when the fair market value is $120 per share.She sells the 100 shares of stock 3 1/2 years later for $140.Determine the recognized gain on the sale and classify it as capital or ordinary.
A)$2,000 LTCG.
B)$2,000 ordinary income.
C)$4,000 LTCG.
D)$4,000 ordinary income.
E)None of the above.

Question

Quizplus · Accepted Answer

The option price of $100 is below the fair market value of $120 on the date of exercise, hence there is no taxable compensation income required to be recognized on the date of exercise. The sale of the stock results in a long-term capital gain of $4,000 ($140 selling price - $120 fair market value on the date of exercise x 100 shares), as the shares were held for more than one year after exercise. The gain is classified as LTCG because the stock was held for more than a year. Therefore, the correct option is (C).

Yvonne Exercises Incentive Stock Options (ISOs)for 100 Shares of Apple