1099B for ESPP Stocks and Ordinary Income; 1099B for Common Stocks Shares Sold

[Campisma]

ESPP Stocks Sale

I sold all the stock shares in 2021 that I purchased through an ESPP from 2003 to 2008. I was not employed in 2021 so would not have received a W2 showing ordinary income from this sale.

I would appreciate help with how to handle the Ordinary Income shown on the line item details pages that accompany the 1099B.

I have a line item details report showing cost basis, gain/loss, and ordinary income.

What do I do with the ordinary income?  I read somewhere that by showing ordinary income, the broker is indicating it should be added to the cost basis. Did I interpret correctly?  Or, do I report it as additional income?  If adding to cost basis do I simply enter the new cost basis figure or should I enter as shown on the 1099B and enter an adjustment (reported cost basis + ordinary income)?  What code do I use?

COMMON STOCK SALE

I received a second 1099B for the 2021 sale sale of common stock purchased with dividends and reinvested dividends.  These shares were acquired from 2003 through 2020.

This 1099B nor the accompanying line item transactions details report shows any ordinary income.  If none is shown, does one assume there is no ordinary income involved?

This 1099B shows two groupings of shares sold: short term and long term each with Proceeds and Cost Basis.  A third grouping is marked as Noncovered Security and Cost Basis is blank. I was able to calculate the cost basis for these transactions with a supplemental report the broker provided.  How do I report this cost basis?  Entered directly or should I report it as an adjustment?  If so, what code do I use?

[RaifH]

For the ESPP stock sale:

The ordinary income element will need to be reported separately. If the broker states that the cost basis reported does not include the ordinary income, then you will have to adjust it. To adjust the basis in TurboTax:

1. In the Federal > Income & Expenses > Investment Income section of your return, click Start/Revisit next to Stocks, Cryptocurrency, Mutual Funds, Bonds, Other (1099-B)
2. Answer Yes and then select stocks. Import or enter your transactions manually. 
3. Enter the transactions as they appear on the 1099-B with the type of employer stock selected as the type of investment.
4. For the employer stock transactions, make sure to select Yes to Do these sales include any employee stock? and select ESPP
5. If the basis reported on the 1099-B is not correct, you will be able to adjust it to match the supplemental information provided under Ok we just need a few more details. Select I have all my info.
6. Enter your sales in the long-term field. You can also enter your ordinary income in the Amount of compensation income for this sale field. This does not add the compensation to your ordinary income. It will have to be done manually with the following steps.

You then need to add the ordinary income element. This is the amount of the discount you received when you purchased the ESPP stock way back when. To report this:

1. With your return open, go to Federal > Wages & Income
2. Open the Less Common Income section and start or revisit the last entry, Miscellaneous Income, 1099-A, 1099-C.
3. Select Other income not already reported on a Form W-2 or Form 1099
4. Select Yes to Did you receive any other wages?
5. Leave household employee income and sick pay blank
6. Select Yes to Did you earn any other wages?
7. Select Other to Enter source of other earned income
8. Enter ESPP Ordinary Income and for the amount, enter only the income element.

For the Dividend Reinvestment Stock:

The short-term transactions reflect the dividends that have reinvested within the last year that you sold as part of the sale. These are all capital gains. Short-term capital gains are taxed at the same rates as ordinary income, but are classified differently than ordinary income. 

For the basis not reported sale:

1. Enter 0 with Box X Unknown holding period. Select short-term if you owned it one year or less. Otherwise, select long-term.
2. Under Select any less common adjustments that apply, select The cost basis on my statement is incorrect and enter your calculated cost basis. This will apply Code B to Form 8949.

[Campisma]

Thank you for your prompt response. I appreciate the detailed information.  I read it several times each time making a little more sense of it.  However, I still have some confusion and want to make sure I’m interpreting your response correctly.   

Please bear with me and forgive the long reply. I’ve taken the approach to list the point of confusion one at a time followed by questions. Please answer each and every question. If the question is not clear, please feel free to restate it and answer it. Hopefully I’ll understand your answers and be able to finally report what I’m supposed to report without over or under reporting.

Background info about ESPP Stock Sale 1099B for your reference

My 1099B only shows a summary line that includes number of shares sold, date sold, proceeds, and noncovered security box checked.  At the top, Reported to IRS, Net Proceeds box is checked. Basis Reported to IRS box is blank.

Attached to the 1099B are several pages of line item details for each transaction showing Description of Property, Date Acquired, Date Sold or Disposed, Proceeds, and Ordinary Income. The Cost or Other Basis and Gain/Loss fields are all blank. All transactions are labeled as Noncovered in the Type of Gain/Loss field.

Ordinary Income

First some general questions about Ordinary Income.

1. Please explain what “ordinary income” is.
2. How is it determined/calculated?
3. Is it part of the Proceeds or Cost Basis, or is it totally separate from these?
4. Your response seems to imply that ordinary income should be in the cost basis and I should ask the broker if it is.  Please explain because I thought cost basis is what was invested to purchase the shares. “Ordinary Income”, in my mind, doesn’t fit that definition.

The first paragraph of your response says “The ordinary income element will need to be reported separately.”

1. Are you stating this because “ordinary income” is in fact additional to Proceeds and/or Cost Basis?
2. Or do you mean ordinary income will need to be reported separately from adjusting the cost basis?

You also say “If the broker states that the cost basis reported does not include ordinary income, then adjust the cost basis.”  I interpret this to mean that ordinary income should be part of the cost basis and should be added in if it isn’t already included.

1. Did I get this right?

I understand the steps you described to adjust the cost basis.  Except for the following sentences.

“You can enter the ordinary income in the Amount of compensation income for this sale field.”

1. Do I enter the Ordinary Income in this field only if the broker says this income is not already included in the cost basis?  I assume yes.

“This does not add the compensation to your ordinary income. It will have to be done manually.”

1. What is “the compensation” in the context of reporting ordinary income?  Please clarify. To me it sounds like “compensation” is yet another element I have to calculate and report in addition to ordinary income.
2. If true, how do I calculate it and where in TurboTax do I report it?

Your second paragraph states “You then need to add the ordinary income element.  This is the amount of the discount received on each purchase way back when.”

1. Is this because the IRS views the discount amount as income?
2. Wouldn’t this have been taxed already in the acquisition years (2003-2008)?  I no longer have those W-2s, but I have to believe my employer reported these as income.

Dividend Reinvestment Stock (DSPP Common Stock)

The 1099B and supplemental report do not show an ordinary income field.

1. Is it safe to assume if it’s not on these reports, there is none?

[RaifH]

Ordinary Income - Your first 4 questions

The ordinary income is the difference between what you paid for the stock and what it was worth at the time of purchase. If you were able to purchase $500 worth of stock for $425 due to a 15% ESPP discount, the ordinary income would be $75. If you were to later sell this stock for $2,000; the transaction should be listed on your 1099-B as cost $500, proceeds $2,000, ordinary income $75. The ordinary income portion should be included in the cost basis. If your cost basis was reported as $425 for this transaction since that is what you actually paid, it would need to be adjusted to $500.

Adjusting your basis

It sounds like your broker did not report anything for the basis on your ESPP purchase, which is possible since at the time you purchased the stock, they were not required to record the basis. 

If you leave the basis blank, the entire proceeds would be considered a long-term capital gain. If you do not have any record of the fair market value of the stock when you made the purchases back in 2003-2008, you may have to look up historical costs on the date of purchase or contact your broker to see if they have the information. You can also try these resources. 

In total in my example, you bought stock for $425 and sold it for $2,000. Of the $1,575 income, $1,500 is a long-term capital gain and $75 is ordinary income. As it currently stands, if you leave the basis blank you will have a $2,000 long-term capital gain and would still have to report the ordinary income of $75. At the very least, even if you can't determine the historical value on the date of purchase, you can adjust the basis to $75 so the ordinary income is not double-reported.

Do I enter the Ordinary Income in this field only if the broker says this income is not already included in the cost basis? 

Yes. Since your broker is not reporting any cost basis, you can add the ordinary income element in the Amount of compensation income from this sale.

What is “the compensation” in the context of reporting ordinary income?  Please clarify. To me it sounds like “compensation” is yet another element I have to calculate and report in addition to ordinary income.

I use ordinary income, compensation income, and bonus element interchangeably. Sorry for the confusion. The long-term capital gain is reported on Form 1099-B. The $75 of ordinary income is what you would enter in the Amount of compensation income from this sale.  It will also need to be added separately to your tax return using the steps I outlined in the previous post.

Is this because the IRS views the discount amount as income?

Yes, exactly. That is the ordinary income of the ESPP transaction. 

Wouldn’t this have been taxed already in the acquisition years (2003-2008)?  I no longer have those W-2s, but I have to believe my employer reported these as income.

The ordinary income element of an ESPP sale is not included in your income until you sell the shares of stock. If you were still working for this employer, it would be included on your W-2 for this year. For all the possible permutations of how ESPP income gets reported, you can refer to this TurboTax article. 

Dividend Reinvestment Stock (DSPP Common Stock)

On the dividend reinvestment stock, there should be no ordinary income reported. It is safe to assume that if it is not on the report, then there is none. 

[Campisma]

Broker confirmed the Ordinary Income they reported is NOT included in the cost basis.   I added it to the reported cost basis and adjusted the cost basis accordingly.  I also reported the Ordinary Income as additional income, and it now appears on line 10 of Schedule 1 and on line 8 of the 1040.   Thank you for all your help!!  I'm now ready to submit my return.

I am required to submit Form 8453 and it specifies Form 8949 must be submitted. In column 1a Description of Property it shows two entries each with the phrase "see attached statement" following the name of the broker.  I can't find anywhere in the help information what this attached statement is supposed to be.  Can you please explain?  I'm submitting my return electronically, and TT mailing instructions is telling me I must physically mail the 8453 and the documents specified therein.  Hence my question about what this "attached statement" is supposed to be/include.

Thank you in advance!!

[RobertB4444]

@Campisma  These are the 1099-B statements that you received from your broker showing the transactions in question.  

[Campisma]

1.  Must I submit the 1099B (s) even though the 1099B (s) indicate they were provided to the IRS by the broker?  

2.  I had to request supplemental documentation from the broker in order to calculate cost basis and gains/losses. Am I required to submit this documentation in addition to the 1099B (s)?

3.  I had to calculate the cost basis for all transactions reported as “non-covered” and left blank by the broker. I made a spreadsheet to calculate the cost basis.  Am I required to submit documentation showing how I calculated it?

4.  I also had to adjust the cost basis by adding the “ordinary income” into the cost basis since the broker said the cost basis they reported on one of the 1099B does NOT include it. Do I have to show this adjustment in some form of documentation?

[GeorgeM777]

1. No, you do not need to separately mail your 1099-B to the IRS.  As you indicated, they have already been provided to the IRS.  Rather, Form 8949 Sale and Other Dispositions of Capital Assets is the form the IRS will use to reconcile amounts on Form 1099-B.

2. No, you do not need to submit the Supplemental Information to the IRS.  

3. No, you do not need to submit your spreadsheet or any other document you created in connection with calculating your cost basis.  However, you should keep such documentation as evidence of your work product in the event you need to explain your analysis.

4. Yes, but again the documentation you created does not need to be submitted to the IRS.  You should keep it though with all of your other documents that relate to your 2021 tax return.  

@Campisma

[Campisma]

Thank you for everyone’s help. I appreciate the responses and responsiveness.