An employer issues Johnny 2,000 stock options in recognition of a very good year.These particular options vest after 24 months from the date of issuance with an exercise price of $21.00 per share.After 24 months,these shares trade in the open market at $25.00 per share,and Johnny decides to exercise his 2,000 options,generating a gain of $8,000 (minus transaction fees).Which statement best describes Johnny's tax situation pursuant to these gains?
A) Because these options were a bonus provided by the employer,there are no tax consequences attributable to Johnny.
B) Because these shares are "under water," Johnny's employer is responsible for any taxes on the gains.
C) Johnny will have to pay taxes based on the corporate tax rate.
D) Johnny's gain will be deemed as income,but taxes will be paid at the capital gains rate.

Question

Quizplus · Accepted Answer

Johnny's exercise of the stock options generates a gain of $8,000, which will be considered as income and subject to taxes. However, since he held the shares for at least 24 months, the gain will qualify for long-term capital gains tax treatment, which is typically lower than the ordinary income tax rate. Therefore, Johnny's gain will be deemed as income, but taxes will be paid at the capital gains rate.

An Employer Issues Johnny 2,000 Stock Options in Recognition of a Very