Question

On February 1 of Year 0, John received a nonqualified stock option to purchase 100 shares of his employer's stock for 10 per share. At the time John received the option, it was selling for5 per share on an established exchange. On September 1 of Year 1, John exercised the options when the stock was selling for 19 per share. On December 1 of Year 2, John sold all of the shares for30 per share. What amount and character of income does John recognize in Year 2?

Answer 1

In Year 2, John would recognize a total income of $2000 from the exercise and sale of the stock options.

Step-by-step explanation:

In Year 2, John would recognize income from the exercise of the stock options and the subsequent sale of the shares. The income recognized from exercising the options is equal to the Fair Market Value (FMV) of the shares on the date of exercise minus the exercise price.

In this case, the FMV of the shares on September 1 of Year 1 was $19 per share, and the exercise price was $10 per share, so the income recognized from exercising the options would be $9 per share ($19 - $10) multiplied by the number of shares (100 shares), which is $900.

The income recognized from the sale of the shares is equal to the selling price minus the FMV of the shares on the date of exercise. In this case, the selling price on December 1 of Year 2 was $30 per share, and the FMV of the shares on September 1 of Year 1 was $19 per share, so the income recognized from the sale of the shares would be $11 per share ($30 - $19) multiplied by the number of shares (100 shares), which is $1100.

Therefore, in Year 2, John would recognize a total income of $2000 ($900 + $1100) from the exercise and sale of the stock options.