An Employer Issues Johnny 2,000 Stock Options in Recognition of a Very

question 21

Multiple Choice

An employer issues Johnny 2,000 stock options in recognition of a very good year. These particular options vest after 24 months from the date of issuance with an exercise price of $21.00 per share. After 24 months, these shares trade in the open market at $25.00 per share, and Johnny decides to exercise his 2,000 options, generating a gain of $8,000 (minus transaction fees) . Which of the following statements regarding Johnny's tax situation pursuant to these gains is true?

• A) Because these options were a bonus provided by the employer, there are no tax consequences attributable to Johnny.
• B) Because these shares are "under water," Johnny's employer is responsible for any taxes on the gains.
• C) Johnny will have to pay taxes based on the corporate tax rate.
• D) Johnny's gain will be deemed as income, but taxes will be paid at the capital gains rate.

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Definitions:

Discount Date

The date on which a bill or note is paid before its maturity, resulting in a deduction from the nominal amount, known as a discount.

Complement Rate

In insurance, it refers to the percentage of coverage that an insurance company does not cover under a coinsurance clause; effectively, it is the portion of the cost that the policyholder must pay after insurance.

Discount Date

The deadline by which a payment must be made to avail of a cash discount for early payment.

Due Date

The specific day by which a payment, project, or assignment is required to be completed or submitted.