Question 1

A taxpayer exercises Non-Qualified Stock Options (NQSOs). The grant price was $10, and the FMV at exercise is $50. They exercise 1,000 shares. What is the tax impact in the year of exercise?

Accepted Answer

1. Identify Option Type: NQSO.
2. Calculate Bargain Element: (FMV $50 - Grant $10) * 1,000 = $40,000.
3. Tax Treatment: Bargain element is Ordinary Income (W-2 wages).
4. Basis Adjustment: Basis = Exercise Price + Income Recognized = $10 + $40 = $50.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Confusing NQSO with ISO rules (no regular tax on exercise) or treating the income as capital gain.

A taxpayer exercises Non-Qualified Stock Options (NQSOs). The grant price was $10, and the FMV at exercise is $50. They exercise 1,000 shares. What is the tax impact in the year of exercise?

How to approach this question

Full Answer

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