Get your taxes done using TurboTax

With ESPP, when the company buys the shares for you, you do not owe any taxes. You are exercising your rights under the ESPP. When you sell the stock, the discount that you received when you bought the stock is generally considered additional compensation to you, so you have to pay taxes on it as regular income.

• If you hold the stock for a year or less before you sell it, any gains will be considered compensation and taxed as such. 
• If you hold the shares for more than one year, any profit will be taxed at the usually lower capital gains rate.

How much of the stock sale price is compensation and how much is capital gain depends on whether your stock sale is a qualifying disposition or a disqualifying disposition.

Disqualifying disposition:

You sold the stock within two years after the offering date or one year or less from the exercise (purchase date).

• In this case, your employer will report the bargain element as compensation on your Form W-2, so you will have to pay taxes on that amount as ordinary income.
• The bargain element is the difference between the exercise price and the market price on the exercise date.
• Any additional profit is considered capital gain (short-term or long-term depending on how long you held the shares) and should be reported on Schedule D.

Qualifying disposition:

You sold the stock at least two years after the offering (grant date) and at least one year after the exercise (purchase date).

• If so, a portion of the profit (the “bargain element”) is considered compensation income (taxed at regular rates) on your Form 1040.
• Any additional profit is considered long-term capital gain (which is taxed at lower rates than compensation income) and should be reported on Schedule D, Capital Gains and Losses.

Please see this TurboTax article for more information and examples. This article also offers examples.

Contact your employer or their payroll office for more information if you are not sure how the compensation portion of the employee stock was shown on your W-2. It may be included in your Box 1 wages and listed separately in Box 14.