Question

The favorable tax treatment of incentive stock options is lost if:

a. The options are exercised early
b. The stock price decreases
c. The employee leaves the company
d. The options are sold before a certain holding period

Answer 1

The favorable tax treatment of incentive stock options can be lost if the options are exercised early, the stock price decreases, the employee leaves the company, or the options are sold before a certain holding period.

Step-by-step explanation:

The favorable tax treatment of incentive stock options is lost if the options are exercised early, the stock price decreases, the employee leaves the company, or the options are sold before a certain holding period. Let's discuss each option:

1. If the options are exercised early, it means the employee is buying the stock before a certain vesting period or before the exercise price has been met. This could result in triggering an immediate taxable event.
2. If the stock price decreases after the options are exercised, the employee may have a capital loss when selling the stock, which could offset the tax benefits.
3. If the employee leaves the company before meeting the required holding period, they may lose the favorable tax treatment of the stock options.
4. If the options are sold before a certain holding period, they may not qualify for the favorable tax treatment.

Overall, it is important for employees to understand the rules and requirements surrounding incentive stock options to maximize their tax benefits.