How to find the Cost Basis of the matching shares from my employer.

[mpapadop]

Through my employer I'm eligible to buy company shares every year via an empoyee stock plan.

My employer is giving back, for 2 shares purchased, 1 share free.

So for last year I received 291.686 free shares, and the day they are released/vested to me, they worth $1475.56. I can see this amount in my payslip and for this amount I paid $437.5 in taxes (federal/ss/medicare).

So this $1475.56 is the cost basis of 291.686 shares or I have to add as well the amount paid in taxes ie $437.5?

[jtax]

If this is a typical employee stock purchase plan (ESPP) you cannot add the withholding to your basis.

The reason is that they took 1475.56 from your pay and used it to purchase the shares (effectively at a discount because of the free shares). But that 1475.56 is still salary income to you and you have to pay full income and payroll taxes on it.  You would have had to pay those taxes even if you spent the money on something other than the ESPP shares. You did not pay those taxes on the shares or to acquire them, but rather on the income you received and just happened to use to acquire the ESPP shares.

When you sell the shares, the discount you received is ordinary income in the year of sale (FMV @ purchase time - price paid). Any gain above FMV @ purchase is capital gain (with a basis of your cost of the shares plus the discount taxed at ordinary income rates in the year of sale) provided that you meet the somewhat complex holding periods (1 yr from purchase & 2 yrs from grant).  https://www.schwab.com/learn/story/espp-taxes

https://fairmark.com/compensation-stock-options/foundation/withholding/

the income tax withholding will be a credit on your income tax return, reducing your tax due or increasing your refund. You can’t include the withholding in the basis of the stock you received, even though it was an amount you had to pay to the company when you received it.

https://www.thetaxadviser.com/newsletters/2024/stock-based-compensation-tax-forms-and-implications/

ESPPs. ESPPs let employees purchase stock, typically with a 5% to 15% discount, through a payroll election (Sec. 423). This operates like a 401(k). The employee makes an election, and the employer reduces the employee’s net paycheck and purchases stock on the employee’s behalf with the amount taken from the paycheck. Unlike a 401(k), however, the employee’s income reported on Form W-2, Wage and Tax Statement, is not reduced by the amount the employer withholds to purchase the stock.

[mpapadop]

I think I was misunderstood. The $1475.56 was not taken out from my payrol to buy shares. 

Every month I contribute a specific amount to buy employer shares and at the end of the year, for every 2 shares bought the employer gives 1 share free.

Here's an example:

I contributed from 8/2023-7/2024 a total of $2,364 to buy 583.372 shares and at 09/2024 the employer gave free 1 share for every 2 shareds bought for a total of 291.686 shares which at the released dat they cost $1475.56. Now this $1475.56 was added as extra income to my payroll and for this I paid $437.50 as taxes.

So this $1475.56 was not taken from my payrol but is extra money that added to show the shares given as free from the employer.

So for those shares I need to calculate the cost basis. Is it the $1475.56 that I was given or I have to add the taxes paid on tip of it to find the cost basis?

[jtax · Accepted solution]

Thank you for clarifying. 

You still do not add the income taxes form the $1475.56 to your basis. The effect of the transaction is that the company gave you extra salary for $1475.56 and you used it to buy those shares. That you have to pay tax on the extra salary does not change the price you paid for those "free" shares.

Think about it outside of the ESPP context.

If you earn $1000 from salary and use it to buy some stock shares in a regular brokerage account, your basis it $1000. That you also have to pay income and FICA tax on the $1000 is irrelevant. That is what is happening here. 

Does that make sense?