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]

Were you able to resolve your issue here or are you still needing guidance? 

Make sure you have ran all updates. 

If using TurboTax Online: Clear your cache and cookies. See this FAQ, for your particular browser.

If using TurboTax Desktop: Please see this FAQ.

If you still are not able to solve this, please call TurboTax Customer service.  Here is a link:  Turbo Tax Customer Service 

[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