Question

Jeff receives an option to purchase shares of ACME Company as a benefit of employment. The option specifies that Jeff can purchases shares for ​$30 each. On January 1 of the current​ year, Jeff exercises options to purchase 140 shares for ​$4,200. At the​ time, the shares are trading for ​$65 each on a public exchange. Using only this information, what are the tax consequences to Jeff when he exercises the stock​ options?

Choose the correct answer.

A. Jim has an adjusted cost base of ​$65​/share in the shares of ACME Company.

B. Jim has a taxable capital gain of ​$21,000.

C. Jim has an adjusted cost base of ​$30​/share in the shares of ACME Company.

D. Jim has a taxable capital gain of ​$10,500.

please show working

personal and corporate tax

Answer 1

the answer is option C. Jim has an adjusted cost base of ​$30​/share in the shares of ACME Company.

explanation: Workers can buy shares at a pre-determined price at a future date, regardless of the price of the stock when the options are exercised. With NSOs, you pay ordinary income taxes when you exercise the options, and capital gains taxes when you sell the shares. here, jeff did not sell the stock options. so he is not liable to pay capital gain taxes.

The adjusted cost base (ACB) is usually the cost of a property plus any expenses to acquire it, such as commissions and legal fees. here the expense jeff incured to purchase stock option is $30 per share.