Module 6:Employee Stock Options

Question 1

Employee Stock Options

Answer 1

Corps grant employees option to purchase stock in corp either in nonqualified or qualified options

Question 2

Nonqualified Options

Answer 2

How is it taxed? When readily ascertainable value at time granted (traded on established market, transferable, no sig restrictions or conditions, fair value of option meets these). If not, then when exercised

Question 3

Nonqualified Options Readily Ascertainable vs. Not readily ascertainable

Answer 3

Readily: Recognize ordinary income date granted. If cost, then value of option minus the cost…no tax on exercise date since already taxed, holding period starts. future sale is capital gain or loss
Not-readily: Tax when exercised (make use of right available in contract to sell), not granted. Use ordinary income on FMV minus cost of the option originally bought. Basis is your exercise price plus ordinary income recognized. And future sales are also capital gains or losses.

Question 4

Qualified Options: Incentive Stock Options (employee right to purchase stock at discount) & Employee Stock Purchase Plans (option employee to just purchase stock in corp)

Answer 4

Incentive Stock Options: No tax deduction to employee. But also is not taxed until sold as capital gain or loss.
Employee Stock Purchase Plans: Option exercise price cant be less than 85% FMV when granted or exercised. Max contribution of 25k a year. Taxed as ordinary income when FMV is greater than option price.
FMV

=ordinary income=