ExpertHard1 markMultiple Choice
CPA · Question 22 · Area IV: Individual Taxation
In Year 1, a taxpayer exercised Incentive Stock Options (ISOs) to purchase 1,000 shares of stock. The exercise price was $10 per share, and the fair market value (FMV) on the exercise date was $25 per share. The taxpayer held the stock through the end of the year. What is the tax consequence for Year 1?
In Year 1, a taxpayer exercised Incentive Stock Options (ISOs) to purchase 1,000 shares of stock. The exercise price was $10 per share, and the fair market value (FMV) on the exercise date was $25 per share. The taxpayer held the stock through the end of the year. What is the tax consequence for Year 1?
Answer options:
A.
$15,000 ordinary income for regular tax purposes.
B.
$15,000 capital gain for regular tax purposes.
C.
No income for regular tax, but a $15,000 adjustment for Alternative Minimum Tax (AMT) purposes.
D.
No income for regular tax or AMT purposes.
How to approach this question
ISO Exercise = No Regular Tax, Yes AMT Adjustment (Spread). NQSO Exercise = Ordinary Income (Spread).
Full Answer
C.No income for regular tax, but a $15,000 adjustment for Alternative Minimum Tax (AMT) purposes.✓ Correct
The exercise of an Incentive Stock Option (ISO) does not trigger taxable income for regular tax purposes (assuming holding period requirements are met later). However, the spread between the FMV and the exercise price ($15 x 1,000 = $15,000) is a positive adjustment for the Alternative Minimum Tax (AMT).
Common mistakes
Treating ISOs like Non-Qualified Stock Options (NQSOs).
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