Hank,

In my experience, it's not a capital gain on a stock option, it's ordinary income. You have an option at $10... The day you exercise that share is a taxable event -- say the market price is $20 that day, incur $10 in ordinary income regardless of how long you held the option.

After that, you own the share, future earnings are st/lt capital gains based on how long you hold from that point.

So I think the whole enchilada in this case is ordinary income.