Yvonne exercises incentive stock options (ISOs) for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21, 2017, 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

To calculate the recognized gain on the sale of the ISO shares, we first need to determine the cost basis of the shares. Yvonne exercised the ISOs at $100 per share, so her cost basis for each share is $100. When she sells the shares for $140 per share, her realized gain is $40 per share.

Since Yvonne held the shares for more than one year (3 1/2 years, to be exact), the gain is considered a long-term capital gain (LTCG), which is taxed at a lower rate than ordinary income.

Therefore, the recognized gain on the sale of Yvonne's ISO shares is $4,000 ($40 per share x 100 shares), and it is classified as a LTCG.

The correct answer is C.

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