Question 1

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?

Accepted Answer

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).

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Applying the general rule (tax at exercise) despite the 'readily ascertainable' fact.

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?

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