Yvonne exercises incentive stock options (ISOs)for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21,2012,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

When Yvonne exercised her ISOs, she had no recognized income or gain at that time. The $20 difference between the option price and the fair market value (FMV) of the stock on the exercise date is not taxed as ordinary income nor is it included in the adjusted basis of the stock. When she sold the shares for $140, she had a long-term capital gain of $40 per share ($140 selling price - $100 option price - $0 commission - $0 adjustment for the $20 FMV difference). Therefore, her recognized gain on the sale of the 100 shares of stock is $4,000 ($40 gain per share x 100 shares), and it is classified as long-term capital gain (LTCG) since the shares were held for more than one year.

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