ESPP Sale

Forum|Forum|1 year ago
March 5, 2025
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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!

Ask the Experts - MetLife VII - Mar 2025

ThomasM125

Level 15

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.

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MarilynG

Level 15

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

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RHS4Author

Level 2

@MarilynG , 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?

MarilynG

Level 15

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

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