Aaron Gold received stock options from his employer, Watlin Ltd., a public company, as part
of his compensation package. The market value at the grant date (November 2010) was $8
per share. Aaron exercised 200 of his options on February 1, 2013 at a cost of $10 per share.
At the exercise date, shares of Watlin were trading at $15 per share. Aaron has no
immediate plans to sell the shares.
Which one of the following explains the implications of the exercise of the options on
Aarons’ 2013 tax return?
A. There will be no tax implications as long as Aaron holds the shares.
B. Aaron’s taxable income will increase by $500 as a result of the exercise of the stock options.
C. Aaron’s taxable income will increase by $700 as a result of the exercise of the stock options.
D. Aaron’s taxable income will increase by $1,000 as a result of the exercise of the options.