Question

Cammie received 100 NQOs (each option provides a right to purchase 10 shares of MNL stock for $10 per share) at the time she started working for MNL Corporation (5/1/Y1) four years ago when MNL’s stock price was $8 per share. Now that MNL’s stock price is $40 per share (8/15/Y5), she intends to exercise all of her options. After acquiring the 1,000 MNL shares with her options, she held the shares for over one year (10/1/Y6) and sold them at $60 per share. (Leave no answer blank. Enter zero if applicable. Input all amounts as positive values.)
Required:
a. What are Cammie’s taxes due on the grant date (5/1/Y1), exercise date (8/15/Y5), and sale date (10/1/Y6), assuming her ordinary marginal rate is 32 percent and her long-term capital gains rate is 15 percent?

Answer 1

Answer:

a. $0

b. $9,600

c. $3,000

Explanation:

a. What are Cammie’s taxes due on the grant date (5/1/Y1)

Since the right was not exercised on the grant date, no tax is due on the grant date.

b. What are Cammie’s taxes due on the exercise date (8/15/Y5)

Number shares = 100 * 10 = 1,000

Purchase value of the share = 1,000 * $10 = $10,000

Market value at exercise = 1,000 * $40 = $40,000

Ordinary income = $40,000 - $10,000 = $30,000

Tax due = $30,000 * 32% = $9,600

c. What are Cammie’s taxes due on the sale date (10/1/Y6)

Sales value = 1,000 * $60 = $60,000

Adjusted basis = $40,000

Long-term capital gains due to sale = $60,000 - $40,000 = $20,000

Tax due = $20,000 * 15% = $3,000