Chapter 35
STOCK OPTION
LEARNING OBJECTIVES:
A. Have a basic understanding of employee stock options
REVIEW:
This chapter provides an overview of employee stock options. Incentive stock
options are discussed in the next chapter, so the focus here is on nonstatutory
stock options. While the benefits are highlighted, caution is suggested especially
when providing options to executives in a position to manipulate stock prices.
Tax implications include the point at which options become taxable. The chapter
concludes with a brief question and answer section.
CHAPTER OUTLINE:
A.
B.
C.
D.
E.
F.
G.
H.
What Is It?
When Is It Indicated?
Advantages
Disadvantages
Implications
Where Can I Find Out More About It?
Questions And Answers
Chapter Endnotes
FEATURED TOPICS:
Stock options
1
Chapter 35
CFP® CERTIFICATION EXAMINATION TOPIC:
Topic 31: Employee stock options
A. Basic provisions
COMPETENCY:
Upon completion of this chapter, the student should be able to:
1. Have a basic understanding of employee stock options
KEY WORDS:
stock option, nonstatutory stock option
DISCUSSION:
1. Discuss advantages and disadvantages to using nonstatutory stock
options.
2. Discuss taxability of stock options, giving special consideration to the
basis in shares acquired under a stock option plan.
QUESTIONS:
1. In the absence of any additional agreement, when is the employee usually
taxed on stock options?
a.
b.
c.
d.
when the option is issued
when the option is exercised
when the underlying stock reaches a target price
when the underlying stock splits
Chapter 35, p. 319
2. On what basis are stock options usually taxed when the option has no readily
ascertainable fair market value?
a. the difference between the fair market value of the shares when
purchased and the option price
b. the fair market value of the shares
c. the option price plus ½ the fair market value of the stock when sold
d. the price when the shares are sold minus the original option value
Chapter 35, p. 320.
Chapter 35
3. What is considered to be the basis in shares acquired under a stock option
plan when an option has no readily ascertainable fair market value?
a. the option price plus the difference between the price of the stock and the
exercise price
b. the strike price plus any commissions
c. the amount paid for the stock minus any additional taxable income
d. the amount paid for the stock plus the amount of taxable income reported
at the time the option was exercised
Chapter 35, p. 320
4. What tax rules apply when an option does have a readily ascertainable fair
market value at the time of the grant?
(1) the option is taxed based on the difference between the stock price and
the option’s value at time of grant
(2) the option is taxed at the time of the grant
(3) the employer receives a tax deduction at the time of the grant
(4) the employee has no further taxable compensation income when the
option is exercised
a.
b.
c.
d.
(1) and (3) only
(1) (2) and (3) only
(2) (3) and (4) only
(1) (2) (3) and (4)
Chapter 35, pp. 320, 321
ANSWERS:
1. b
2. a
3. d
4. d