Final answer:
When Randy exercised his ISOs on April 17, of the current year, the tax consequence to him is twofold: he will have to recognize ordinary income equal to the difference between the exercise price and the fair market value of the stock at the time of exercise, and he may also be subject to a capital gains tax if he sells the stock in the future.
Step-by-step explanation:
When Randy exercised his ISOs on April 17, of the current year, the tax consequence to him is twofold: he will have to recognize ordinary income equal to the difference between the exercise price ($3) and the fair market value of the stock ($5) at the time of exercise, and he may also be subject to a capital gains tax if he sells the stock in the future.
For the ordinary income, Randy will have to recognize $15,000 as ordinary income on his tax return, calculated as (fair market value - exercise price) x number of ISOs exercised. This amount will be subject to both federal and state income tax, as well as Medicare and Social Security taxes.
If Randy decides to sell the stock in the future, he will be subject to a capital gains tax on any appreciation in the value of the stock since he exercised his ISOs. The capital gains tax rate will depend on how long Randy held the stock before selling it. If he holds the stock for at least one year, he will qualify for the long-term capital gains tax rate, which is generally lower than the ordinary income tax rate. If he sells the stock before one year, he will be subject to the short-term capital gains tax rate.