Case 11. Stock purchased by an employee (Intermediate Difficulty)

Sally became an employee of DotGismo, Inc., a privately held firm. On December 15, 20X3, Sally was allowed to buy 20,000 shares of DotGismo stock for $40,000 dollars. When Sally bought the stock, each share was worth $2. DotGismo retained the right to repurchase each share for $2 original purchase price if Sally leaves DotGismo at any time during the next two years for any reason. DotGismo stock increased to $5 per share in December 15, 20X5, when the two year restriction ended. Sally sold the stock on January 18, 20X6 for $9 per share, after the announcement of a new patent for DotGismo. Advise Sally roughly how much tax she must pay and for what year(s). Assume Sally is in the 35% tax bracket for ordinary income and 15% for long term capital gains.