Martin Corporation granted an incentive stock option to employee Caroline on January 1,2011.The option price was $150,and the FMV of the Martin stock was also $150 on the grant date.The option allowed Caroline to purchase 160 shares of Martin stock.Caroline exercised the option on August 1,2013 when the stock's FMV was $250.Unless otherwise stated,assume Caroline is a qualifying employee.If Caroline sells the stock on September 5,2014 for $350 per share,she must recognize (ignore alternative minimum tax)
A)0)No gain or loss is recognized at exercise or sale with incentive stock options.
B)long-term capital gain of $16,000 in 2014.
C)ordinary income of $16,000 on the exercise date and a long-term capital gain of $16,000 in 2014.
D)long-term capital gain of $32,000 in 2014.

Question

Quizplus · Accepted Answer

Since Caroline exercised the option and held the stock for more than 1 year before selling, she will have a long-term capital gain. The calculation for the gain is (selling price - exercise price) x number of shares, which would be ($350 - $150) x 160 = $32,000. There is no ordinary income recognized with the exercise of incentive stock options.

Martin Corporation Granted an Incentive Stock Option to Employee Caroline