on NON-qualifying income is added to her w-2 so effectively the fair market value on the date of exercise is her basis. so little or no capital gain or loss if sold immediately. it makes no difference if she sells and gives you the cash or she gifts you the stock immediately and you sell immediately. again little or no capital gain or loss. your basis is her basis. (loss can result if the broker charges a fee for selling or there is an odd lot differential and also for some other reasons) FMV is usually the average of high and low on the date exercised. since market prices fluctuate during the day the actual sales price can be more or less than the average - more and you have a short-term capital gain less you have a short term capital loss.
as for ISOs, she must hold them for a period of time otherwise ordinary income on disposition. talk to your HR department for more info. possibly also alternative minimum tax. ISOs offer the advantage of ending up with long-term capital gain which currently probably has a lower tax rate than ordinary income. sell too soon and it's ordinary income. read the article.
