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 holds the stock for only seven months and sells the shares for $140 per share.Determine the recognized gain on the sale and classify it as capital or ordinary.
A) $2,000 ordinary income and $2,000 STCG.
B) $2,000 ordinary income and $2,000 LTCG.
C) $4,000 ordinary income.
D) $4,000 LTCG.
E) None of the above.

Question

Quizplus · Accepted Answer

Yvonne's recognized gain is $4,000 ($140 - $100 = $40 gain per share x 100 shares). Since she did not meet the holding period requirement for ISOs (at least 1 year after exercise and 2 years after grant), the gain is split into $2,000 ordinary income (difference between exercise price and fair market value at exercise: $120 - $100 = $20 per share x 100 shares) and $2,000 short-term capital gain (difference between sale price and fair market value at exercise: $140 - $120 = $20 per share x 100 shares).

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