In the formula for net after-tax proceeds of stock options, which expression is used as the base calculation?

In the formula for net after-tax proceeds of stock options, which expression is used as the base calculation?

• A. MV minus Price to exercise
• B. Price to exercise plus MV
• C. Price to exercise minus MV
• D. (Price to exercise minus MV) × 0.5 + tax.

Answer: (C)

The key idea is the gain you realize at exercise. The starting point for net after-tax proceeds is the amount by which the stock’s market value at exercise exceeds the price you paid to exercise. This difference—market value at exercise minus the exercise price—is the intrinsic value of the option when you exercise. It’s the amount that is generally treated for tax purposes as the bargain element (and thus drives the tax calculation) and, after tax, becomes your net proceeds if you immediately sell or hold for future gains. The other expressions either flip the sign, combine values in a way that doesn’t reflect the actual economic gain, or apply an arbitrary factor, which don’t represent the base amount you’re ultimately taxed on or receive as net proceeds.

The key idea is the gain you realize at exercise. The starting point for net after-tax proceeds is the amount by which the stock’s market value at exercise exceeds the price you paid to exercise. This difference—market value at exercise minus the exercise price—is the intrinsic value of the option when you exercise. It’s the amount that is generally treated for tax purposes as the bargain element (and thus drives the tax calculation) and, after tax, becomes your net proceeds if you immediately sell or hold for future gains. The other expressions either flip the sign, combine values in a way that doesn’t reflect the actual economic gain, or apply an arbitrary factor, which don’t represent the base amount you’re ultimately taxed on or receive as net proceeds.