In a nonqualified stock option plan, what must Mark recognize regarding income?

In a nonqualified stock option plan, the individual must recognize ordinary income upon exercising the options. This is because nonqualified stock options do not receive any special tax treatment under the Internal Revenue Code until they are exercised. At the time of exercise, the difference between the market value of the stock and the option's exercise price is considered taxable income, categorized as ordinary income.

This approach is crucial for understanding the tax implications of stock options. Upon exercising the nonqualified option, the recipient must report this income, which directly impacts their taxable earnings for that year. It's important to note that the tax obligation arises at exercise, not at the time of sale of the stock. Thus, when Mark exercises the option, he will need to pay income tax based on the spread between the market price and the exercise price of the option.

The other choices, such as recognizing capital gains upon sale or enjoying tax deductions for losses, do not apply at the time of exercise for nonqualified stock options. Instead, capital gains would only become relevant when the stock acquired through the option is eventually sold, at which time the taxpayer would need to consider the holding period and any gain or loss realized. Similarly, while tax deductions for losses can occur in various contexts, they do not