Question

M is employed by X Corporation. The corporation granted M qualified stock options (ISO’s) on June 1, 2019. The stock was worth $25 per share at the time of grant. The options allow M to purchase 1,000 shares of stock at $30 per share ($30,000 total cost) within the next two years. Additional details: The options had no value on the date of grant as the stock was selling for $25 per share. M exercised the options July 5, 2020 when the stock was worth $70 per share. A. How much income or gain, if any, should M recognize in the year of grant (2019)? B. How much income or gain, if any, should M recognize in the year of exercise (2020)? C. Assume a change of facts: Assume M sold the stock 5 months after the options were exercised for $130,000. How much gain or income, if any, should M recognize? Be sure to identify the character of the gain and/or income to be recognized (i.e. capital or ordinary)

Answer 1

(a) Calculation of Gain/ (Loss) M shall recognize in the year of grant (2019) ;-

Loss at time of grant = (Fair value of exercise option of share -Fair market value of share at time of grant) x Number of share

                                = ($30 - $ 25) x 1000

                               = $ 5,000

(b) Calculation of Gain/ (Loss) M shall recognize in the year of exercise (2020) :-

Gain at time of Exercise as on July 5, 2020 = ( Exercise option of share -Fair market value at time of grant) x Number of share

                                    = ($ 70 -$ 30 ) x 1000

                                    = $ 40,000

(c) . Calculation of Gain/ (Loss) M shall recognize at time of sale :-

Gain at time of sale of shares = Sale Value of shares - Exercise value of shares

                                   = $ 1,30,000 - ( $ 75 x 1000)

                                     = $ 1,30,000 - $ 75,000

                                     = $ 55,000