Get your taxes done using TurboTax

Some of your stock sale price was a "disqualifying disposition." The difference between that and a qualifying disposition is how long you waited after the purchase date to sell. You probably also received a 1099-B from the broker when you sold.

You will have to report the sale of stock in TurboTax. The statement will probably report your investment basis (cost) accurately, but we're including an example and overly detailed explanation at the bottom to ensure you don't pay more taxes than you have to on the sale.

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 be taxed at lower rates than compensation income) and should be reported on Schedule D, Capital Gains and Losses.

In this situation, you sell your ESPP shares less than one year after purchasing them.

Example:

Because this is a disqualifying disposition, your employer should include the bargain element in Box 1 of your 2016 Form W-2 as compensation. The bargain element is calculated this way:

1. Subtract the actual price paid from the market price at the exercise date
2. Multiply the result by the number of shares: ($25 - $21.25) x 100 = $375

Even if your employer didn't include the bargain amount in Box 1 of Form W-2, you must report this amount as compensation income on line 7 of your Form 1040.

You must also show the sale of the stock on your 2016 Schedule D, Part I for short-term sales because there was less than one year lapsed between the date you acquired the stock (June 30, 2015) and the date you sold it (January 20, 2016).

The sales price you report on Schedule D is $4,990 and the cost basis is $2,500. Your short-term capital gain is the $2,490 difference ($4,990 - $2,500).

How did we come up with these amounts?

The gross sales proceeds from selling the shares is the market price at the date of the sale ($50) times the number of shares sold (100), or $5,000. You then subtract any commissions paid at the sale ($10 in this example), to arrive at the sales price amount of $4,990 reported on Schedule D. Your broker will show this amount on Form 1099-B that you'll receive at the beginning of the year following the year you sold the stock.

The cost basis is the actual price you paid per share (the discount price) times the number of shares ($21.25 x 100 = $2,125), plus the amount reported as income on line 7 of your form 1040 (the $375 bargain element we calculated above), for a final cost basis of $2,500.