Question

On February 1 of year 0, John received a nonqualified stock option to purchase 100 shares of his employer’s stock for $10 per share. At the time John received the option, it was selling for $5 per share on an established exchange. On September 1 of year 1, John exercised the options when the stock was selling for $19 per share. On December 1 of year 2, John sold all of the shares for $30 per share. What is the amount and character of income that John must report in year 0?

$0

$500, ordinary

$500, capital

$1,000, ordinary

Answer 1

Answer: 500 ordinary

Explanation

john must reported ordinary income in the amount of 500(100*5). On the date of granted in the year 0

Non qualified stock option .

John adjusted basis in the stock is 1500 ( 1000 exercises price+500 is ordinary income)

The exercises price is (100*10)=1000

John has a long term capital gain in the year 2 ,ordinary income in the amount of 500,so the selling price of 3000 (100*30), now less the adjusted basis of income 2500 (3000-500)

The amount of character John has reported income in the year of 0 has he deduction the amount of tax is 500 in the year 0, the amount of 500 has ordinary income recognized by the John.