CEP CEP Equity Award Transactions & Processing

Question 1

When an employee exercises a nonqualified stock option (NQSO), what is the tax treatment at the time of exercise?

Accepted Answer

The spread is treated as ordinary income subject to payroll taxes

Answer

The spread is treated as a long-term capital gain

Answer

There is no tax consequence until the shares are sold

Answer

The exercise price is deducted as a business expense

Question 2

Which of the following is a same-day sale (cashless) exercise for a stock option?

Accepted Answer

The employee exercises and immediately sells enough shares to cover the exercise price and taxes, keeping the remainder

Answer

The employee pays the exercise price from personal funds and holds all shares

Answer

The employee exchanges already-owned shares to pay the exercise price

Answer

The employee receives a cash payment equal to the option spread without receiving shares

Question 3

What is a 'sell-to-cover' RSU release transaction?

Accepted Answer

Selling a portion of the vested RSU shares to cover the tax withholding obligation

Answer

Selling all vested shares immediately upon vesting

Answer

Using a broker loan to defer tax payments

Answer

Transferring shares to a trust to cover tax liability

Question 4

Which transaction method allows an optionee to use previously owned shares to pay the exercise price of a stock option?

Accepted Answer

Stock swap exercise

Answer

Net exercise

Answer

Cashless exercise

Answer

Cash exercise

Question 5

Under a net exercise (net share settlement) of a stock option, how are the shares delivered to the participant?

Accepted Answer

Only the net shares representing the spread value, after withholding for taxes and exercise price, are delivered

Answer

All shares underlying the option are delivered to the participant

Answer

Shares equal to the exercise price are delivered

Answer

Cash equal to the net spread is delivered instead of shares

Question 6

What is the significance of the 'grant date' in the lifecycle of an equity award?

Accepted Answer

It is the date from which the vesting schedule begins and fair market value for pricing purposes is established

Answer

It is the date the participant can first sell their shares

Answer

It is the date taxes are withheld by the employer

Answer

It is the date the option exercise price may be changed