[barelystayingsane]

For non-qualified options without a readily ascertainable value, Becker says that “on the date of exercise, the employee recognizes ordinary income based on the fair market value of the stock purchased less amounts paid (if any) for the option. The basis of the stock is the actual exercise price plus any ordinary income recognized.” Assuming that the employee didn’t pay anything for the option, his ordinary income would be equal to the FMV of the stock. So then his basis would be equal to the exercise price plus the FMV (i.e. the ordinary income recognized)? That doesn’t seem right to me…that would almost be like double-counting the basis to a certain extent. Is this worded incorrectly, or am I misreading it?

[k1zuna]

Nonqualified Option (without a readily ascertainable value at grant date)

1. Employee taxation

1)

Grant date: nothing happens.

Exercise date: Ordinary income = FMV of stock on exercise date – exercise price

AB of stock = exercise price + ordinary income

Sell date: FMV – AB = gain/loss

2) If option lapses, no tax consequence.

3) Holding period of stock begins on exercise date.

2. Employer taxation

1) Employer deducts value of option as business expense, when employee recognizes ordinary income at exercise date.

FAR - Passed
AUD - Passed
BEC - Passed
REG - 8/22/2013

[barelystayingsane]

Yeah, that makes more sense that ordinary income would be the difference between the FMV of the stock and the exercise price, but Becker has ordinary income as the FMV less the amount paid for the option (which is different than the exercise price/the amount paid for the stock). Is that just a typo on Becker's part?

[k1zuna]

I see what you're saying regarding Becker.

My notes either came from my tax class or wiley book or becker MCQS explanation… I forgot which (lol), but I'm pretty sure it's correct.

FAR - Passed
AUD - Passed
BEC - Passed
REG - 8/22/2013

[barelystayingsane]

Cool! Thanks! That makes a lot more sense. So basically the basis in your stock would be the FMV on the exercise date, since basis is Exercise Price + Ordinary Income => Exercise Price + (FMV – Exercise Price) => FMV?

[k1zuna]

yeah

FAR - Passed
AUD - Passed
BEC - Passed
REG - 8/22/2013

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