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exceeds the option price that he or she pays. Sec. 83(a); Racine
v. Commissioner, T.C. Memo. 2006-162; sec. 1.83-7(a), Income Tax
Regs. The recipient thereupon obtains a basis in the acquired
stock equal to the option price plus any amount includible in
gross income as a result of the option exercise. Any gain or
loss upon the subsequent sale of the stock will be capital in
character. Secs. 1001, 1221(a); sec. 1.83-4(b)(1), Income Tax
Regs.
Certain employee stock options qualify for alternative
treatment under the provisions of section 421. Specifically,
section 421 applies to options that qualify as incentive stock
options (ISOs) under section 422 (and to options that are issued
pursuant to an employee stock purchase plan as defined in section
423). When the applicable section 422 requirements for an ISO
are met, section 421 provides that no income shall result at the
time of the transfer of stock upon the exercise of the option.
Sec. 421(a)(1). The stock acquired through the ISO exercise will
generally qualify as a capital asset in the hands of the
employee, and the difference between the amount received on
disposition of the stock and the employee's basis will be capital
in character. Secs. 1001(a), 1221 and 1222; Spitz v.
Commissioner, T.C. Memo. 2006-168; sec. 14a.422A-1, Q&A-1,
Temporary Income Tax Regs., 46 Fed. Reg. 61840 (Dec. 21, 1981).
However, if the stock acquired pursuant to an ISO is disposed of
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Last modified: May 25, 2011