Fay received 1,000 nonstatutory stock options (NSOs) when sh…
Fay received 1,000 nonstatutory stock options (NSOs) when she started working at Gumbo Co. At that time, the stock price was $11 per share. The options vest in two years, and each option gives her the right to purchase one share of stock for $10 per share. After three years, when the share price was $20 per share, she exercised all her options. More than one year later, Fay sold all her shares for $24 per share. Fay’s marginal tax rate on ordinary income is 32 percent, and her rate on income taxed at a preferential rate is 15 percent. How much tax must Fay pay related to the options on the following dates? Grant date – Vest date – Exercise date – Sale date – What is the amount and date of Gumbo’s tax deduction with respect to the NSOs? Assume Fay is low on cash and must perform a cashless exercise to exercise her shares. What is the minimum number of shares she must sell to generate enough cash to exercise the options and pay any tax due on the exercise? Assume that shortly after Fay was hired, Gumbo’s share price fell significantly and never recovered. What are the tax consequences associated with the NSOs, if any, for both Fay and for Gumbo if the stock options expire unused?