In 2017, BT granted a nonqualified stock option to Pieter to buy 500 shares of BT stock at $20 per share for five years. At date of grant, BT stock was trading on Nasdaq for $18.62 per share. In 2022, Pieter exercised the option when BTs stock was trading at $31.40 per share.

Required:

How much income did Pieter recognize in 2017 and 2022 because of the stock option?

Pieter recognizes no income in the year of grant and $5,700 ordinary income ($11.40 bargain element 500 shares) in the year of exercise.

Compute Pieter's basis in the 500 shares.

Pieter's basis is $15,700 ($31.40 per share). The aggregate basis equals $10,000 cost plus $5,700 recognized income.

What are the tax consequences of the stock option to BT in 2017 and 2022?

BT has no tax consequences in the year of grant and a $5,700 ordinary deduction in the year of exercise.