Incentive Stock Options Quiz

Test your knowledge of incentive stock options (ISOs).

Please answer the following 14 questions. This quiz is also a course of study. The answer key links to content on the topic for follow-up reading. For in-depth courses of study that offer CE credits, see the myStockOptions Learning Center.

1. What is an incentive stock option (ISO)?

A stock option that allows deferral of share delivery at exercise A stock option that qualifies for beneficial tax treatment under Section 422 of the Internal Revenue Code A stock option that qualifies for beneficial tax treatment under US Labor Department Regulations All of the above

2. What is the difference between incentive stock options and nonqualified stock options (NQSOs)?

ISOs have their own specific rules in the Internal Revenue Code ISOs confer better tax treatment if the employee meets certain requirements Exercising ISOs can subject the employee to the alternative minimum tax All of the above

3. For companies, what is the disadvantage of granting ISOs instead of NQSOs?

ISO taxation is more complex for their employees ISOs require following stringent IRS regulations and Internal Revenue Code rules With ISOs, the company incurs the same accounting charge as with NQSOs but ends up with no tax benefit to offset against the expense unless a disqualifying disposition occurs All of the above

4. Which of the following cannot receive a grant of ISOs?

Employees Executives Consultants and contractors Employees working outside the United States

5. What is the limit on the value of ISOs that can become exercisable in the same calendar year?

$25,000 $50,000 $75,000 $100,000

6. After ending employment with the company for no special reason (e.g. disability), under the tax code how long do you have to exercise ISOs before they lose their tax-qualified status and become NQSOs?

One month Two months Three months Six months

7. If you satisfy the statutory ISO requirements, what is the special tax benefit offered by ISOs?

When you sell the shares, your capital gain is not taxed When you sell the shares, your capital gain is taxed at 50% of your income tax rate When you sell the shares, you receive favorable long-term capital gains tax treatment for all appreciation over the exercise price When you sell the shares, you defer taxes on the gains for five years

8. How long must you hold ISO shares to qualify for the beneficial ISO tax treatment?

More than two years after grant and one year from exercise More than two years after vesting and one year from exercise More than one year after grant and one year from exercise More than one year after vesting and one year from exercise

9. What is a disqualifying disposition?

A transfer of ISO shares after the statutory holding periods have been met A transfer of ISO shares before the statutory holding periods have been met Another term for a wash sale Another term for a Section 409A violation

10. After an employee exercises ISOs and holds the shares through the end of the calendar year, what tax information from the exercise is included on Form W-2?

The cost basis of the ISO shares The exercise spread plus the related withholding for income tax, Social Security, and Medicare The exercise spread but not tax withholding Nothing from the exercise appears on Form W-2

11. After an employee exercises ISOs and sells the shares immediately, what tax information from the exercise is included on Form W-2?

12. What is the alternative minimum tax (AMT)?

A tax on ISOs that was introduced to fund Obamacare A punitive tax on ISOs that was introduced to address excessive executive compensation The minimum amount of tax that you have to pay if income is not withheld by your employer An alternative to the regular tax system introduced to prevent the wealthy from avoiding tax liability

13. Why are people with ISOs sometimes subject to the AMT?

The ISO exercise spread is a positive adjustment in your AMT income calculation The ISO exercise spread is a negative adjustment in your AMT income calculation The ISO exercise spread is a positive adjustment in your regular income calculation The ISO exercise spread is a negative adjustment in your regular income calculation

14. After an ISO exercise, what form(s) must the company file with the IRS and send to you soon after the end of the calendar year?

Form 3922 Form 3921 Form 1099-B All of the above

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