Question

Sweet Sarah received 10 NQOs (each option gives her the right to purchase 20 shares of stock for $5 per share) from her employer at the time she started working when the stock price was $7 per share. Now that the share price is $20 per share, she intends to exercise all of the options. Two years later Sweet Sarah sells the stock for $22 per share, what is Sweet Sarah's basis in her stock for purposes of calculating the gain or loss?A. $1,000.B. $1,400.C. $4,000.D. $4,400.

Answer 1

C) $4,000.

Step-by-step explanation:

Sweet Sarah's basis should be the stock price at the moment that she decided to exercise her stock options. In this case Sarah decided to exercise her options when the stock was worth $20 each, therefore her basis would be = 10 NQO x 20 shares per NQO x $20 per share = $4,000.

Sarah's taxable gain = ($22 x 200) - $4,000 = $400