Final answer:
Blake has a long-term capital gain of $19,000 when he sells his stock that had vested at a higher price than when he was granted the stock, assuming he filed an 83(b) election at the time of the award.
Step-by-step explanation:
If Blake correctly files an 83(b) election when the restricted stock is awarded at $7, the total value at grant date will be 1,000 shares times $7, resulting in a gross income inclusion of $7,000. This amount is reported as W-2 income in the year of the grant, despite the stock not being vested yet. Three years later, when the stock vests at a price of $26, there is no additional ordinary income since the 83(b) election locked in the taxable amount at the grant date.
Upon selling the vested stock, the long-term capital gain is calculated based on the difference between the sale price and the price at which the income was reported. Since Blake has held the stock for more than a year after making the 83(b) election, he will have a long-term capital gain. In this case, the calculation would be 1,000 shares times ($26 - $7), which is a capital gain of $19,000. Therefore, the correct answer is Blake has a long-term capital gain of $19,000 in the year he sells the stock (Option D).