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goddamonabc
Level 2

How is ESPP shares taxed if it's invested/exchanged into an exchange fund?

I have some good amounts of ESPP shares from a company. I know the tax consequences to sell them, and I intend to exchange these shares into an Exchange Fund. Anyone knows how is the initial discount (bargain element) received on the ESPP shares reported or tracked upon exchange into an exchange fund?
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Accepted Solutions
SusanY1
Employee Tax Expert

How is ESPP shares taxed if it's invested/exchanged into an exchange fund?

My apologies for not fully understanding the question.  In the case of an exchange into a qualified tax-deferred plan, the bargain element will be still be considered ordinary income at the time of the exchange.

 

You will report the ordinary income from the bargain element based on the value at the time of the exchange (this portion of the transaction will be calculated the same as if you sold the stock).  Your company may report this on your W-2 for you.  If it is reported on your W-2, you will see an entry in Box 14.  If you're not sure if it is included, contact your payroll department.   

 

If your company does not report the income on your W-2 you will report as ordinary income (Line 7 of Form 1040) the lesser of:

  • The gross sales price (exchange value) minus the actual discounted price paid per share less any sales commission. 
  • The per-share company discount times the number of shares. 

 

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4 Replies
SusanY1
Employee Tax Expert

How is ESPP shares taxed if it's invested/exchanged into an exchange fund?

These will be treated as two separate transactions, even though you may never handle the cash.  

 

When you sell the ESPP shares, you will realize the gain, including the bargain element, at the time of the sale.  There is no tax benefit to re-invest the proceeds in an Exchange Traded Fund (ETF) or other investments.

 

The basis in your ETF will not include any of the bargain element from your ESPP, as they are two separate transactions.   

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goddamonabc
Level 2

How is ESPP shares taxed if it's invested/exchanged into an exchange fund?

Thanks for the reply Susan. However, I'm referring to an "Exchange Fund", not an ETF. See https://www.barrons.com/articles/the-tax-benefits-of-exchange-funds-51560794410

 

Basically a tax-deferring vehicle where the "exchange" is not considered a sale. Cap gain should be deferred but it's unclear to me how the bargain element is treated. 

Critter
Level 15

How is ESPP shares taxed if it's invested/exchanged into an exchange fund?

Since you are not selling your stock it seems you have nothing to report.  Instead the stock is being moved as is into another investment vehicle ... I highly recommend you ask the plan administrators  how this "pooling" of stock works for income taxes. 

SusanY1
Employee Tax Expert

How is ESPP shares taxed if it's invested/exchanged into an exchange fund?

My apologies for not fully understanding the question.  In the case of an exchange into a qualified tax-deferred plan, the bargain element will be still be considered ordinary income at the time of the exchange.

 

You will report the ordinary income from the bargain element based on the value at the time of the exchange (this portion of the transaction will be calculated the same as if you sold the stock).  Your company may report this on your W-2 for you.  If it is reported on your W-2, you will see an entry in Box 14.  If you're not sure if it is included, contact your payroll department.   

 

If your company does not report the income on your W-2 you will report as ordinary income (Line 7 of Form 1040) the lesser of:

  • The gross sales price (exchange value) minus the actual discounted price paid per share less any sales commission. 
  • The per-share company discount times the number of shares. 

 

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

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