CPA · Question 01 · Area I: Individual Compliance and Planning
In Year 1, an executive is granted 1,000 Incentive Stock Options (ISOs) with an exercise price of $10 per share when the market price is $10. In Year 3, the executive exercises all options when the market price is $50 per share. In Year 5, the executive sells the stock for $70 per share. Assume the executive meets all holding period requirements. What are the tax consequences in Year 3?
Answer options:
Ordinary income of $40,000 for regular tax purposes.
No income for regular tax purposes, but an AMT adjustment of $40,000.
Capital gain of $40,000 for regular tax purposes.
No income for regular tax purposes and no AMT adjustment.
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