Lily received 100 stock options (each option provides a right to purchase 10 shares of ABC stock
for $15 per share) at the time she started working for ABC three years ago when ABC’s
stock was worth $10 per share. Now ABC’s stock is worth $20 per share and she intends to
exercise all her options. After acquiring the 1,000 ABC shares with her options, she held the
shares for over one year and sold them at $30 per share.
Situation A
If the stock options are incentive stock options what are the tax consequences to Lily and ABC
on the grant date, the exercise date and the date she sold the stock? Would it make any difference
if she sold the stock 6 months after the exercise date? If so, how?
Situation B
If the stock options are nonqualified stock options what are the tax consequences to Lily and
ABC on the grant date, the exercise date and the date she sold the stock? Would it make any
difference if she sold the stock 6 months after the exercise date? If so, how?
Solution
Answer:
Tax Consequences:
If the stock options are incentive stock options then there shall be no tax consequences on grant
date and the exercise date. But tax shall be applicable on gain on sale of investment at the time of
sale.