Question

What if the value of the stock right is 15% more than the value of the underlying stock?

A. No tax consequences
B. Taxed as ordinary income to the shareholder
C. Treated as a capital gain
D. Deductible business expense
E. A and B only

Answer 1

The value of stock rights being higher than the underlying stock does not lead to immediate tax consequences; profits upon sale would be taxed as capital gains.

Step-by-step explanation:

When the value of the stock right is 15% more than the value of the underlying stock, this extra value does not directly result in tax consequences. Typically, the issuance of stock rights and their value difference compared to the underlying stock does not trigger immediate taxation.

When those rights (or the underlying stock) are exercised and eventually sold, the profit realized from the sale would be considered a capital gain if the asset's value has increased in that time.

This capital gain would be subject to capital gains tax at the time of sale, not at the time of right issuance or valuation. A capital gain is the increase in the value of an asset, such as a stock, between when it is bought and when it is sold. In this case, the stock has gained 15% in value.

Therefore, the correct answer is C. Treated as a capital gain.