🎥+✏️Employee Stock Options🟢

Responses

1. 

   Vinny D 22 February 2025

   When the stock options lapse, and as mentioned it’s a capital loss, is it always short-term? Or can it depend on how long the options were held?

2. 

   Martavious Moates 15 June 2025

   Why is John’s basis 7500 and not 2500?

   1. 

      Maroun, CPA 17 June 2025

      Hello Martavious,

      John’s $2,500 of ordinary income is only the “bargain‐element” of the option (the $5 per share you’re taxed on). Your tax basis in the stock is everything you’ve “invested” in it:
      – Cash paid on exercise: 500 shares × $10 = $5,000
      – Income recognized at exercise: 500 shares × ($15 FMV − $10 exercise price) = $2,500

      Together, those give you a cost basis of $5,000 + $2,500 = $7,500. If you used only $2,500 as John’s basis, you’d ignore the $5,000 he actually paid to buy the shares.

      I hope this makes sense!

3. 

   Prem Lalwani 23 February 2026

   In the video when Farhat is giving an example it seems that the exercise price = fmv of the stock and if we continue with the video I got the clarity that exercise price = strike price. please correct me if I am wrong.

   1. 

      Maroun, CPA 27 February 2026

      Hello Prem,

      You are correct, the exercise price is the same as the strike price.

      In the example shown, the strike (exercise) price is $40 (set on the grant date). The FMV of $50 is the market price at the exercise date.

      The option is “in the money” when the FMV of the stock is greater than the exercise (strike) price.
      If FMV > $40 → in the money
      If FMV < $40 → out of the money Since the FMV is $50, which is greater than the $40 strike price, the option is in the money. Hope this helps!

4. 

   Rohit Saran 30 August 2026

   For Non-Qualified Stock with determinable option price. Employer can deduct FV of option price ($1000) as explained in video. Employer should also be able to deduct $2500 (diff between FV on exercise date – Exercise price), correct?

   1. 

      Maroun, CPA 31 August 2026

      Hello Rohit,

      No, the employer does not get a second deduction for the $2,500 at exercise in this example.

      Because the nonqualified stock option had a readily ascertainable value at the grant date, John recognized ordinary income of $1,000 at the grant date. The employer’s deduction generally matches the amount of compensation income recognized by the employee, so the employer deducts $1,000 at that time. The IRS notes that nonstatutory options with a readily determinable fair market value are taxable at grant, while options without a readily determinable value are taxed at exercise.

      The $2,500 amount at exercise is not a second compensation deduction here because John is not recognizing additional ordinary income at exercise. That appreciation is reflected later in the employee’s capital gain or loss when the stock is sold.

      Therefore, the rule is:
      • If the NQSO has a readily ascertainable value at grant → employee recognizes ordinary income at grant, and employer deducts that same amount.
      • If the NQSO does not have a readily ascertainable value at grant → employee recognizes ordinary income at exercise, and employer deducts the bargain element at exercise.

      Hope this helps!