Question

When must a taxpayer who has received stock appreciation rights from an employer include the value of the rights in income?

a. in the year in which the rights are granted
b. in the year in which the taxpayer is free to exercise the rights
c. in the year in which the rights are exercised
d. never

Answer 1

Answer: c

Explanation:

Answer 2

A taxpayer must report the value of stock appreciation rights as income in the year they are exercised. When exercised, the benefit received is taxed as ordinary income and subject to withholding.

Step-by-step explanation:

A taxpayer must include the value of stock appreciation rights (SARs) in income in the year in which the rights are exercised (choice c). This means that the taxable event occurs when the employee exercises the rights and receives the appreciation on the stock.

The income recognized is often the fair market value of the stock at the time the SARs are exercised minus the price set in the SARs agreement. It is treated as ordinary income, and it is typically subject to federal income tax, social security tax, and Medicare tax. Employers must withhold these taxes at the time of exercise.