ExpertMedium1 markMultiple Choice
CPA · Question 17 · Area 1: Individual Tax
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?
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?
Answer options:
A.
$40,000 Ordinary Income; Basis becomes $50/share.
B.
$0 Income; Basis is $10/share.
C.
$40,000 Capital Gain; Basis becomes $50/share.
D.
$50,000 Ordinary Income; Basis becomes $50/share.
How to approach this question
1. Identify Option Type: NQSO.<br/>2. Calculate Bargain Element: (FMV $50 - Grant $10) * 1,000 = $40,000.<br/>3. Tax Treatment: Bargain element is Ordinary Income (W-2 wages).<br/>4. Basis Adjustment: Basis = Exercise Price + Income Recognized = $10 + $40 = $50.
Full Answer
A.$40,000 Ordinary Income; Basis becomes $50/share.✓ Correct
The taxpayer recognizes ordinary income equal to the bargain element: ($50 - $10) * 1,000 = $40,000. The basis in the stock is stepped up to the FMV at exercise ($50).
Common mistakes
Confusing NQSO with ISO rules (no regular tax on exercise) or treating the income as capital gain.
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