Reporting ordinary income on ESPP sale loss

[tax enthusiast 2024]

I participated in my company's ESPP program for several years. I purchased the stock and held it for over 2 years making it a qualified disposition.

After that the company's stock tanked and I sold the shares at a loss for less than the original purchase price.  I received a W2 from the company for the bargain element I received as part of the ESPP program.  I read in various places that if the sale is a qualifying disposition and you sell for less than the purchase price then you do not have to report the bargain element as ordinary income.

Can someone tell me if this is true or not?  I'm concerned that my past employer reported the income on a W2 so now I have to report it even if I may not have to.

For example:

• Purchase 100 shares of ABC stock as part of ESPP program
• Current share price at time of purchase was $100
• Discounted price was $85 at purchase ($15 bargain element)
• Sold shares over 2 years later for $50 a share
• I've reported the capital loss of $35 per share
• Do I need to report the $15 per share bargain element if I sold for a loss on a qualified disposition?

[CatinaT1]

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[tax enthusiast 2024]

This was not an answer, yes I still need help.  The software is not helpful at all.

[Rick19744 · Accepted solution]

A couple of comments:

• If you have a qualifying disposition, and the stock is sold at a loss, there is no ordinary income recognition of the bargain element.
• Your facts are not entirely clear, but if the bargain element is included in your W-2, which many times it is, then you need to contact the employer to have them issue you a corrected W-2.

[tax enthusiast 2024]

Thank you, this confirms what I thought.  I've reached out to my previous employer but they state that they are reporting it correctly and it is up to my tax professional to file it correctly.  They will not issue a revised W-2.

Guessing this will trigger an audit since there is W2 income bring reported that is not being accounted for.

[Rick19744]

I would recommend reflecting the W-2 exactly as is it reported.

Doing anything other than that and you will incur more professional fees and time to address the IRS question than you will most likely pay in additional tax.

Post tax season, I would then meet with a tax professional who can help you work through this matter with an amended tax return.

[tax enthusiast 2024]

Thanks.  I already filed with the W2 exactly as stated and was planning on doing an amended return explaining why the W2 income was removed.

[ThomasM125]

When you prepare the amended return, you can enter a negative adjustment to income to remove the additional income reported in error.

Also, the income reported on your W-2 is taxed as ordinary income versus capital gain income reported on the stock sale. If you factored the income reported on the W-2 into the cost basis of the stock sold, by adding it to the cost, your overall loss would be the same as if it had been reported properly. It may be that you pay more tax since some of the loss is being reflected as ordinary income that is then offset by a capital loss. But the overall loss reported would be the same. So, I'm not sure if there will be that much of a difference when you amend the return. 

You can make that adjusting entry in TurboTax as follows:

1. From the Federal menu in TurboTax find Wages and Income 

2. Find Less Common Income

3. Choose Miscellaneous Income, 1099-A, 1099-C

4. Choose Other Reportable Income

5. Enter a description of the adjustment and the adjustment as a negative number

[Snowy_Desert]

I know this is an old post but I am in the same boat. From what I understood, you sold qualifying ESPPs at a loss (I did too LOL), your cost basis should be the same price you paid (The 85% price). If you did disqualifying ESPPs, then you have to use the 'adjusted cost basis'. Do you use e-Trade? If so, they provide a supplemental doc each year that has an adjusted cost basis column. Use that doc.

[tax enthusiast 2024]

Glad I'm not the only one in the same boat.  My ESPP provider was not E*Trade so I did not have the adjusted cost basis column in my reports.  

I did have to adjust my cost basis using the 3922 forms because the 1099-B just had an aggregate number that was incorrect.  Again I just used what was reported to me and did not adjust anything further.

I also adjusted my W2 income based on what was added for the bargain element.

[Snowy_Desert]

Glad you were able to amend. I am amending my 2023 as well. I made the same mistake, I left the ESPPs (Disqualifying ones), as they are for cost basis and got double-taxed for over $2,000. 

Quick question, when you say you also adjusted your W-2. what do you mean by that? The only spot the ESPPs would go as reference is box 14 (Also factored in box 1). Do you mean you had to 'edit' your W-2 entries and put the box 14 info? Just trying to understand all I need before amending my 2023. Thanks! 

[tax enthusiast 2024]

I left the W2 itself alone and reported it as is shown on the document.

I went to the Misc income section in TT and added a negative offset amount with a description of what it was for and why.

[Snowy_Desert]

I see. I am correcting on form 8949, didn't know you could just put it on the other MISC income. But did you really have to report that though? Qualifying ESPP at a loss you just use the cost basis reported on the 1099-B as far as I know.

[tax enthusiast 2024]

The cost basis on the 1099-B doesn't reflect the W2 ordinary income reported from the bargain element.  

In order to offset that ordinary income you need to adjust it with Misc Income, which has nothing to do with the capital gains income the 1099-B covers.

[MarilynG1]

The bargain element reported as income on your W-2 is added to the Cost Basis of the ESPP shares (price when exercised), to report the sale from Form 1099-B.

Divide that amount by number of shares and add that to the Cost Basis per share when entering your 1099-B to report a sale of shares..  Check the box that says 'cost basis is missing or incorrect' and enter the correct Cost Basis on the next page. 

You can enter this in TurboTax as a regular stock sale; you don't need to indicate Employee Stock.

Here's more detailed info on Employee Stock Purchase Plans.

@Snowy_Desert 

@tax enthusiast 2024