anjanja I think that's correct
@capri – it's one of those things you just have to remember the old fashioned way. Here are my notes on it:
1) Incentive Stock Option (aka qualified, i think)
Completely ignore it until the stock is actually sold. So nothing happens on the grant date or exercise date. Once the stock is sold, it will be either a LTCG or (See below posts, the ordinary income part was wrong in this one)
To be a LTCG, it must have been held for 2 years since the grant date, and 1 year since the exercise date. So the fastest way you could get a LTCG from it would be Granted on 1/1/20X1, Exercised 1/1/20X2, Sold 1/2/20X3.
2) Non-qualifed Stock Option
At the grant date, you once again ignore it. However, at the exercise date you recognize ordinary income.
The ordinary income = (FMV of stock price at exercise date – exercise price) x # of shares exercised
Now, any time you resell it after the exercise date it is automatically a capital gain.
Also, for both of these, the corporation may deduct the portion that is ordinary income (I assume as salary expense but I don't have that specified in my notes)
EDIT – I just thought of this, to remember it think of qualified/incentive stock options as being an INCENTIVE to hang onto the stock because if you hold it long enough, it will be a LTCG. So you are incentivized to hold the stock longer than the non-qualified, so it has the longest waiting time for LTCG (2 yrs from grant date & 1 yr from exercise date)
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