A taxpayer receives a non-qualified stock option (NQSO) with a readily ascertainable fair market value at the grant date. When is the income recognized?

Answer options:

At the grant date.

At the exercise date.

When the stock is sold.

It is never taxable.

How to approach this question

NQSO Rule: If Value is Known (Ascertainable) -> Tax Now (Grant). If Value Unknown -> Tax Later (Exercise).

Full Answer

A.At the grant date.✓ Correct

For Non-Qualified Stock Options, if the option has a readily ascertainable FMV at the grant date (e.g., traded on an exchange), it is taxed as ordinary income at the grant date. If not, it is taxed at the exercise date.

Common mistakes

Confusing NQSO with ISO (Incentive Stock Options) or assuming no FMV at grant.

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