TCP EXAM (CPA) 2025/2026 QUESTIONS
AND ANSWERS 100% PASS
What are stock options?
An incentive mechanism to align the interests of shareholders and managers, by giving the
recipient the right (but not the obligation) to buy a company's stock at a predetermined price
sometime in the future
What is restricted stock?
Stock is given to an employee but they can't do anything with it until they spend a certain
amount of time with the company
What are Stock Appreciation Rights (SARs)?
The employee is not given shares, but they have the right to compensation for the increase in
the share's value
Grant Date
When the employee receives the award
Vesting Date
When the employee has the right to exercise the equity award (restrictions lapse)
Exercise Date
When the employee purchases stock using stock options or cashes out SARs
Sale Date
When the employee sells restricted stock or stock acquired using stock options
1 @COPYRIGHT 2025/2026.
,Expiration Date
When the rights under the equity award lapse, or expire, unused
What are the 2 types of employee stock options?
1) Nonstatutory (nonqualified)
2) Statutory (qualified: ISOs and ESPPs)
When does a stock have a readily determinable value?
1) When it's traded on an established market, or
2) Meets ALL of the following conditions:
-Option is transferable
-Option is exercisable immediately in full when it's granted
-There are no conditions or restrictions that would have a significant effect on the value
-The fair value of the option privilege can be readily determined
What type of income does an employee recognize for a nonstatutory stock option with a readily
determinable value?
Ordinary compensation income (value of the option minus the cost)
-Note that any future sale of the stock could result in a capital gain or loss
What is the basis and holding period of a nonstatutory stock option with a readily determinable
value?
Basis: exercise price plus any amount previously taxed on the date of grant
Holding Period: begins with the exercise date
What happens if an employee allows a nonstatutory stock option with a readily determinable
value to lapse?
There is a capital loss based on the value of the options previously taxed
What is the basis and holding period of a nonstatutory stock option without a readily
determinable value?
Basis: the FMV of the stock when the stock option was exercised plus previous taxable income
Holding Period: begins with the exercise date
When is a nonstatutory stock option without a readily determinable value taxed?
Taxed on the exercise date
-Taxed on the difference between the exercise price and the FMV on the exercise date
What happens if an employee allows a nonstatutory stock option without a readily
determinable value to lapse?
2 @COPYRIGHT 2025/2026.
,The employee can deduct a capital loss equal to the price, if any, that the employee paid for the
options
What are 7 key points relating to Incentive Stock Options (ISOs)?
A type of statutory stock option
1) The exercise price may not be less than the FMV of the stock at the GRANT date
2) Once exercised, the stock must be held for at least 2 years after the grant date AND at least 1
year after the exercise date
3) The options must be exercisable within 10 years of the grant date
4) An employee may exercise up to $100,000 of ISOs in a year (excess amount will be treated as
a nonstatutory option)
5) The employee must remain an employee of the corporation from the option's grant date
until 3 months (1 year if due to permanent and total disability) before the option is exercised
6) The employee may not owe more than 10% of the combined voting power as of the grant
date
7) The ISO must be granted under a written plan document and approved by shareholders
What are the 8 key points relating to Employee Stock Purchase Plans (ESPPs)?
A type of statutory stock option
1) The exercise price may not be less than the lesser of 85% of the FMV of the stock at the grant
OR exercise date
2) Once exercised, the stock must be held for at least 2 years after the grant date AND at least 1
year after the exercise date
3) The options must be exercisable within 27 months of the grant date
4) An employee can only acquire the right to purchase up to $25,000 of stock per year
5) The employee must remain an employee of the corporation from the option's grant date
until 3 months (1 year if due to permanent and total disability) before the option is exercised
6) The employee may not owe more than 5% of the combined voting power as of the grant date
7) The ESPP must be granted under a written plan document and approved by shareholders
8) The plan must be available to all full-time employees other than highly compensated
employees and those with less than 2 years of employment
How are gains/losses classified for statutory stock options?
If the two/one year holding requirements are satisfied, then then the gain/loss is capital.
If the two/one year holding requirements are not satisfied, then any gain is ordinary up to the
lesser of the difference between the exercise price and the stock's FMV on the exercise (OR
GRANT) date. Any excess gain is capital gain. Any loss is a capital loss.
What happens if statutory stock options lapse?
3 @COPYRIGHT 2025/2026.
, No deduction is available as the option was not taxed as income in the first place (a loss may
occur if any amount was paid for the option itself)
What is the excess of the FMV of the stock on the exercise date over the exercise price treated
as?
A preference item for Alternative Minimum Tax (this is a bargain purchase)
How is restricted stock taxed?
Recognized as compensation income for the FMV of the stock on the vesting date
What is the basis and holding period for restricted stock?
Basis: The FMV on the vesting date
Holding Period: begins on the vesting date
What is an 83(b) election?
An employee may elect to recognize ordinary compensation income for the FMV of the
RESTRICTED stock on the GRANT date (rather than vest date)
-Must be made within 30 days of the date the restricted stock award is granted and is
irrevocable
-Not available for Restricted Stock Units (RSUs)
What are Restricted Stock Units (RSUs) and how are they treated for tax purposes?
Not actual shares of employer stock, but rather a promise to give an employee a specified
number of unrestricted shares of employee stock on the vesting date
-Employees recognize ordinary compensation income for the FMV of the stock on the vesting
date, just like restricted stock
How are Stock Appreciation Rights (SARs) treated for tax purposes?
Employee recognized ordinary compensation income for the amount of the cash payment
when the SAR is exercised
How are below-market-rate loans treated?
The taxpayer may have to report any foregone interest as interest income/deduction
When do you not have to report imputed interest on a below-market-rate loan?
-Loans that are $10,000 or less for gift loans between individuals, compensation-related and
corporate-shareholder loans
-Loans that don't have significant effects on federal tax liability, such as government-subsidized
loans (ie., student loans), automobile loans, zero-interest period on a credit card, work
relocation loans, foreign-person loan, and gift loans to a 501(c)(3) organization
4 @COPYRIGHT 2025/2026.
AND ANSWERS 100% PASS
What are stock options?
An incentive mechanism to align the interests of shareholders and managers, by giving the
recipient the right (but not the obligation) to buy a company's stock at a predetermined price
sometime in the future
What is restricted stock?
Stock is given to an employee but they can't do anything with it until they spend a certain
amount of time with the company
What are Stock Appreciation Rights (SARs)?
The employee is not given shares, but they have the right to compensation for the increase in
the share's value
Grant Date
When the employee receives the award
Vesting Date
When the employee has the right to exercise the equity award (restrictions lapse)
Exercise Date
When the employee purchases stock using stock options or cashes out SARs
Sale Date
When the employee sells restricted stock or stock acquired using stock options
1 @COPYRIGHT 2025/2026.
,Expiration Date
When the rights under the equity award lapse, or expire, unused
What are the 2 types of employee stock options?
1) Nonstatutory (nonqualified)
2) Statutory (qualified: ISOs and ESPPs)
When does a stock have a readily determinable value?
1) When it's traded on an established market, or
2) Meets ALL of the following conditions:
-Option is transferable
-Option is exercisable immediately in full when it's granted
-There are no conditions or restrictions that would have a significant effect on the value
-The fair value of the option privilege can be readily determined
What type of income does an employee recognize for a nonstatutory stock option with a readily
determinable value?
Ordinary compensation income (value of the option minus the cost)
-Note that any future sale of the stock could result in a capital gain or loss
What is the basis and holding period of a nonstatutory stock option with a readily determinable
value?
Basis: exercise price plus any amount previously taxed on the date of grant
Holding Period: begins with the exercise date
What happens if an employee allows a nonstatutory stock option with a readily determinable
value to lapse?
There is a capital loss based on the value of the options previously taxed
What is the basis and holding period of a nonstatutory stock option without a readily
determinable value?
Basis: the FMV of the stock when the stock option was exercised plus previous taxable income
Holding Period: begins with the exercise date
When is a nonstatutory stock option without a readily determinable value taxed?
Taxed on the exercise date
-Taxed on the difference between the exercise price and the FMV on the exercise date
What happens if an employee allows a nonstatutory stock option without a readily
determinable value to lapse?
2 @COPYRIGHT 2025/2026.
,The employee can deduct a capital loss equal to the price, if any, that the employee paid for the
options
What are 7 key points relating to Incentive Stock Options (ISOs)?
A type of statutory stock option
1) The exercise price may not be less than the FMV of the stock at the GRANT date
2) Once exercised, the stock must be held for at least 2 years after the grant date AND at least 1
year after the exercise date
3) The options must be exercisable within 10 years of the grant date
4) An employee may exercise up to $100,000 of ISOs in a year (excess amount will be treated as
a nonstatutory option)
5) The employee must remain an employee of the corporation from the option's grant date
until 3 months (1 year if due to permanent and total disability) before the option is exercised
6) The employee may not owe more than 10% of the combined voting power as of the grant
date
7) The ISO must be granted under a written plan document and approved by shareholders
What are the 8 key points relating to Employee Stock Purchase Plans (ESPPs)?
A type of statutory stock option
1) The exercise price may not be less than the lesser of 85% of the FMV of the stock at the grant
OR exercise date
2) Once exercised, the stock must be held for at least 2 years after the grant date AND at least 1
year after the exercise date
3) The options must be exercisable within 27 months of the grant date
4) An employee can only acquire the right to purchase up to $25,000 of stock per year
5) The employee must remain an employee of the corporation from the option's grant date
until 3 months (1 year if due to permanent and total disability) before the option is exercised
6) The employee may not owe more than 5% of the combined voting power as of the grant date
7) The ESPP must be granted under a written plan document and approved by shareholders
8) The plan must be available to all full-time employees other than highly compensated
employees and those with less than 2 years of employment
How are gains/losses classified for statutory stock options?
If the two/one year holding requirements are satisfied, then then the gain/loss is capital.
If the two/one year holding requirements are not satisfied, then any gain is ordinary up to the
lesser of the difference between the exercise price and the stock's FMV on the exercise (OR
GRANT) date. Any excess gain is capital gain. Any loss is a capital loss.
What happens if statutory stock options lapse?
3 @COPYRIGHT 2025/2026.
, No deduction is available as the option was not taxed as income in the first place (a loss may
occur if any amount was paid for the option itself)
What is the excess of the FMV of the stock on the exercise date over the exercise price treated
as?
A preference item for Alternative Minimum Tax (this is a bargain purchase)
How is restricted stock taxed?
Recognized as compensation income for the FMV of the stock on the vesting date
What is the basis and holding period for restricted stock?
Basis: The FMV on the vesting date
Holding Period: begins on the vesting date
What is an 83(b) election?
An employee may elect to recognize ordinary compensation income for the FMV of the
RESTRICTED stock on the GRANT date (rather than vest date)
-Must be made within 30 days of the date the restricted stock award is granted and is
irrevocable
-Not available for Restricted Stock Units (RSUs)
What are Restricted Stock Units (RSUs) and how are they treated for tax purposes?
Not actual shares of employer stock, but rather a promise to give an employee a specified
number of unrestricted shares of employee stock on the vesting date
-Employees recognize ordinary compensation income for the FMV of the stock on the vesting
date, just like restricted stock
How are Stock Appreciation Rights (SARs) treated for tax purposes?
Employee recognized ordinary compensation income for the amount of the cash payment
when the SAR is exercised
How are below-market-rate loans treated?
The taxpayer may have to report any foregone interest as interest income/deduction
When do you not have to report imputed interest on a below-market-rate loan?
-Loans that are $10,000 or less for gift loans between individuals, compensation-related and
corporate-shareholder loans
-Loans that don't have significant effects on federal tax liability, such as government-subsidized
loans (ie., student loans), automobile loans, zero-interest period on a credit card, work
relocation loans, foreign-person loan, and gift loans to a 501(c)(3) organization
4 @COPYRIGHT 2025/2026.
