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

Answer options:

At the exercise date.

At the grant date.

When the stock is sold.

At vesting.

How to approach this question

NSO Rule: If you know what it's worth at grant (rare, usually public options), tax it then. If you don't (most employee options), wait until exercise.

Full Answer

B.At the grant date.✓ Correct

At the grant date.

IRC §83. If an option has a readily ascertainable fair market value at the time of grant, it is taxed as ordinary income at the grant date. If not, it is taxed at exercise.

Common mistakes

Applying the 'exercise date' rule which is standard for most employee options because they lack readily ascertainable value.

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