Under a nonqualified stock option (NQSO) plan which is granted to Damon on March 15, 2015, he may purchase 200 shares of stock from his employer at $15 per share. At that date, the option does not have a readily ascertainable fair market value. Eight months later on the date of exercise the fair market value of the stock is $20. On December 1, 2017, Damon sells 100 shares for $24 each. Which of the following would be the result of these transactions on the date of exercise and the date of sale?
A)Ordinary income of $1,000 and a long-term capital gain of $400.
B)Ordinary income of $1,200 and a long-term capital gain of $300.
C)Ordinary income of $2,400 and a long-term capital gain of $0.
D)Ordinary income of $1,000 and a short-term capital gain of $400.
E)None of the above.

Question

Quizplus · Accepted Answer

Damon recognizes ordinary income of $1,000 on the exercise date (200 shares x ($20 - $15)). When he sells 100 shares for $24 each, he has a long-term capital gain of $400 (100 shares x ($24 - $20)).

Under a Nonqualified Stock Option (NQSO) Plan Which Is Granted