ExpertHard1 markMultiple Choice
CPA · Question 52 · Area I: Individual Compliance and Planning
A taxpayer receives a non-qualified stock option (NSO) with a readily ascertainable fair market value of $5,000 at the grant date. The exercise price is $20,000. The taxpayer exercises the option when the stock FMV is $50,000. What is the income recognized at grant and exercise?
A taxpayer receives a non-qualified stock option (NSO) with a readily ascertainable fair market value of $5,000 at the grant date. The exercise price is $20,000. The taxpayer exercises the option when the stock FMV is $50,000. What is the income recognized at grant and exercise?
Answer options:
A.
Grant: $0; Exercise: $30,000
B.
Grant: $5,000; Exercise: $30,000
C.
Grant: $5,000; Exercise: $0
D.
Grant: $0; Exercise: $25,000
How to approach this question
NSO Rule: If Readily Ascertainable FMV -> Tax at Grant. If NOT -> Tax at Exercise. Scenario says 'readily ascertainable'. Tax $5k at grant. Exercise is not a taxable event (basis = $20k cash + $5k income = $25k).
Full Answer
C.Grant: $5,000; Exercise: $0✓ Correct
C
IRC §83. Since the option has a readily ascertainable FMV, the employee recognizes $5,000 ordinary income at grant. There is no tax at exercise; the basis in the stock becomes the exercise price plus the amount taxed at grant.
Common mistakes
Applying the general rule (tax at exercise) despite the 'readily ascertainable' fact.
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