Question

Bob was granted some nonqualified stock options in January 2013. He exercised them in March 2014 for $20,000 (when the FMV of the stocks was $65,000) and sold them for $82,000 in December 2016. What is the tax consequence of the sale? What if he sold the stocks in October 2014 for $72,000?

Answer 1

Case 1: If he sold such non-qualified stock on December 2016, then net gain on sale of non-qualified stock [$ 82,000 - $ 65,000] , i. e $ 17,000 will be considered as long term capital gain. Because the holding period of stock is more than 1 year.

Long term capital gain tax is 0% for income ranging from $ 0 to $ 39,375. So, Long term capital gain tax liability is $ 0

Case 2: If he sold such non-qualified stock on October 2014,then net gain on sale of non-qualified stock [ $ 72,000 - $ 65,000] i.e $ 7,000 will be considered as short term capital gain. Because the holding period of stock is not more than one year .

Short term capital gain treated as ordinary income, so net tax liability calculated as = $ 7,000 X 10% = $ 700

Note: In both the case base price for stock considered for sale is $ 65,000. Because during the time of exercise Bob paid tax on the excess portion of FMV over exercise price .