Question

Yost received 300 NQOS ( each option gives Yost the right to purchase 10 shares of Cutter Corporation stock for $19 per share) at the time he started working for Cutter Corporation three years ago. Cutter's stock price was $19 per share. Yost exercises all of his options when the share price is $38 per share. Two years after aquiring the shares, he sold them at $59 per share.

a.) What are Yost's amount of income/gain recognized and amount of taxes payable on the grant date, exercise date, and sale date, assuming his ordinary marginal rate is 35 percent and his long-term cpaital gains rate is 15 percent?

	Income Amount	Taxes Due
Grant date
Exercise date
Sale date

Answer 1

No. of shares acquired by Yost = 200 x 10 = 3000 shares
Amount needed to exercise = No. of shares x Strike price per share = 3000 x 15 = $45,000
Market value of shares =  No. of shares x Market price per share = 3000 x 26 = $78,000
Ordinary Income = Market value of share - Amount needed to exercise
= $78,000 - $45,000 = $33,000

The liability in the year of exercise = Ordinary Income x marginal tax rate
= $33,000 x 35% = $11,550

Long term capital gain = Amount realized - Adjusted basis
= 3000 x 47 - 78000 = $63,000

The liability in the year of sale = Long term capital gain x marginal tax rate
= $63,000 x 15% = $9,450