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 two years and sells the shares for $115 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) $1,500 LTCG.
E) None of the above.

Question

Quizplus · Accepted Answer

The option price of $100 per share is less than the fair market value of $120 per share on the exercise date, so there is no regular tax consequences of exercising the options. However, Yvonne's holding period for the shares begins on May 21, 2012, the exercise date. Since the shares are sold for $115 per share before the end of the required holding period, the entire gain of $15 per share is considered short-term capital gain (STCG). The recognized gain is calculated as $15 per share x 100 shares = $1,500. Therefore, the correct answer is D) $1,500 LTCG.

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