Question

Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share) at the time she started working when the stock price was $6 per share. When the share price was $15 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $20 per share. How much gain will Maren recognize on the sale of the shares and how much tax will she pay assuming her marginal tax rate is 37 percent?a. $0 gain and $0 tax. b. $560 gain and $84 tax. c. $560 gain and $196 tax. d. 1120 gain and $168 tax.

Answer 1

$500 gain and $100 tax

Step-by-step explanation:

The gain realized is $500 (100 shares × $20) less basis (100 shares × $15 exercise price). The tax is calculated as follows: $500 × 20% (preferential rate).

Answer 2

$500 gain and $185 tax

Step-by-step explanation:

Sale of share = No. of NQOs × No. of shares × Selling price per share

= 10 × 10 × $20

= $2,000

Basis = No. of NQOs × No. of shares × share price @$15

= 10 × 10 × $15

= $1,500

Gain realised = Sale of share - Basis

= $2,000 - $1,500

= $500

The tax is calculated as follows:

= Gain realised × marginal tax rate

= $500 × 37%

= $185