ESPP Sale

[RHS4]

Hello,

I have some questions about ESPP (Employee Stock Purchase Plan) sales, I want to avoid double taxation. Specifically, I would like to discuss the differences between qualifying and non-qualifying dispositions and how the holding period affects this.

I sold some stock in 2024 that I had purchased in 2024. On my W-2, I noticed information in Box 14 "Other [Amount] DQDIS," which matches the discount I received on the purchase of the employee stock I sold.
My question is: what should I enter as the Cost or Other Basis—"Exercise Price paid per share" or "FMV per share on exercise date" from Form 3922?

Here is an example:

W-2:

• Box 14: Other 10 DQDIS

Form 3922:

• Exercise Price paid per share: $100
• FMV per share on exercise date: $110

Form 1099-B:

• Date Acquired: 03/30/2024
• Date Sold: 04/01/2024
• 1d Proceeds: $110
• 1e Cost or Other Basis: [empty]

If more information is needed, please let me know.

Thank you for your assistance!

[ThomasM125]

Since the discount of $10 is reported on your W-2 as wage income, and the stock was sold at its fair market value of $110, that would be the cost basis, $110. You have no capital gain since the total gain is reflected on your W-2 form as wage income. 

[MarilynG1]

A Qualifying Disposition would be when You sold the stock at least two years after the offering (grant date) and at least one year after the exercise (purchase date).  A Non-Qualifying Disposition would be when you sold the stock within two years after the offering date, or one year or less from the exercise (purchase date).

Your Cost Basis per share would be the Exercise Price per share, plus the amount of your discount that was added to your W-2, divided by the number of shares you sold.

For example, if you exercised and sold 100 shares, and $1000 was added to your W-2 for your discount, divide the $1000 by 100 ($10)  and add that to the Exercise Price per share (let's say it was $50), so your Cost Basis per share would be $60 when reporting the sale on a 1099-B.

Once you know your Cost Basis, you can enter your 1099-B as a regular stock sale (don't indicate employee stock, as that takes you through an interview to help you determine your Cost Basis), and check the box that says 'my cost basis is missing or incorrect' and enter the correct Cost Basis on the next page. 

Here's more detailed info on Employee Stock Purchase Plans that also discusses Qualifying/Non-Qualifying issues.

@RHS4 

[RHS4]

@MarilynG1 , thanks for the response, I have some more questions.

After reading the article, I understand that the discount portion is always taxed as ordinary income, regardless of whether it is a Disqualifying or Qualifying Disposition. To me, both examples seem the same when discussing the discount portion. For capital gains, it follows the regular stock behavior. Am I right?

I also have another question: When should I add the discounted portion to my ordinary income if I decide to hold Employee Stock for, let's say, 10 years?

• When I sell in 10 years?
• At the moment it becomes Qualifying?

[MarilynG1]

Yes, you can report the sale as a regular stock sale; however, be aware of the Long-Term/Short-Term designation when entering your 1099-B.  Long-Term you held the stock over a year before selling (from vesting date).  Short-Term if less than a year.

Your employer should automatically add the discount to your W-2 income in Box 1 when you take ownership of the shares (vest).  You just need to keep that info for whenever you sell the shares later to calculate your Cost Basis when reporting the sale.

You should see this on your W-2, possibly with a notation in Box 14 of the amount. Then divide that amount by number of shares that vested at that time, to add to the Exercise Price.

@RHS4 

[RHS4]

For example, I received some ESPP stocks in 2023. This means that in my 2023 W-2, the total amount in Box 1 should include the discount portion for the ESPP. Let's say I received 100 stocks, each with a $10 discount. If Box 1 shows $5,000, then $1,000 of that amount comes from the ESPP discount. When I sell the ESPP stocks in 2033, I only need to include the capital gain, because the discounted part was already taxed as ordinary income in my 2023 tax return. Is that how it works? 

@MarilynG1 

[ThomasM125]

In the case of most employee stock, the discount is reported on your W-2 in the year you sell the stock. There are exceptions to this as in the case on non-qualifying stock options and restricted stock units. But either way, you would only report capital gains in the year you sell the shares and only in an amount equal to the proceeds minus the acquisition cost of the stock minus the discount amount. Also, in the case of incentive stock options held more the a year from the acquisition date and two years from the grant date, there is no discount reported and all of the income is capital gain income. 

[DaveF1006]

Yes, the discount you received when purchasing the ESPP shares is typically included as part of your ordinary income and reported in Box 1 of your W-2 for the year of purchase. In your example, the $1,000 discount would be taxed as ordinary income in 2023.

Inn 2033 when you plan on selling the shares, you will only be taxed on the capital gains just as long as this is a "Qualified Disposition".  A qualified Disposition is one that:

• You hold the shares for more than one year after the purchase date. and
• You hold the shares for more than two years after the grant date (the start of the offering period).

If it is a "disqualified Disposition", then the discount could be taxed again. More than likely in 2033, this will be a "qualified Disposition".