Which of the following is true regarding stock options?
A) A loss is realized when stock options lapse.
B) There is typically no tax effect on the grant date.
C) The bargain element on a nonqualified option is taxed to employees at capital gain rates.
D) Income recognized on the exercise date is greater for incentive stock options than nonqualified options.

Question

Quizplus · Accepted Answer

There is typically no tax effect on the grant date for stock options. The tax is generally realized when the option is exercised and the employee receives the underlying stock, at which point the difference between the fair market value and the exercise price is taxed as ordinary income. The choice A is incorrect because a loss is not realized when stock options lapse, but rather the option simply becomes worthless. The choice C is incorrect because the bargain element on a nonqualified option is taxed as ordinary income, not at capital gain rates. The choice D is incorrect because income recognized on the exercise date is actually greater for nonqualified options than for incentive stock options, as it is taxed as ordinary income rather than at the potentially lower capital gains rates.

Which of the Following Is True Regarding Stock Options