Question

Wade Inc. granted a nonqualified stock option for 100 shares at 50 per share to Mary, an employee, on May 1, Year 12. On that date, the option was selling on an established market for 4 per share. Mary exercised the option on August 2, Year 13, when the FMV was 80 per share. She sold the stock on September 2, Year 14, for 100 per share. How much gross income and what type did Mary recognize in Year 12?

Answer 1

Mary did not recognize any gross income in Year 12 from the nonqualified stock option granted to her by Wade Inc., as nonqualified stock options are typically taxable upon exercise, not upon grant, and no action was taken by Mary in Year 12.

Step-by-step explanation:

In Year 12, Mary does not recognize any gross income from the nonqualified stock option granted to her by Wade Inc. because she did not exercise or sell the stock in that year. Nonqualified stock options typically result in taxable income upon exercise, not upon grant, provided that the option does not have a readily ascertainable fair market value.

Since the question does not indicate that Mary's option had a readily ascertainable fair market value at the time of grant, it is assumed that the option is taxed upon exercise.

The information provided does not indicate any action taken by Mary, such as exercising or selling the stock, during Year 12. Therefore, no taxable event occurred, and Mary did not recognize any income from the option in Year 12. The $4 market value of the option is not recognized as income in Year 12.