Disqualifying Disposition?

[Bryan46]

Hi, 

I am currently learning the ESPP and I have a question. 

If my ESPP was offered on July 15 2019 and I purchased on January 2020. Stock was sold February 2021. Since it's less than 2 years from the date it was offered. Is this disqualifying disposition? 

Thanks,

Bryan

[JoeD_CPA_CFP · Accepted solution]

Hi Bryan46,

Here are the facts as I understand them:

• ESPP stock was purchased in January 2020 during the July 2019 offering period.
• ESPP stock was sold in February 2021.

That means that this was a disqualifying disposition. A qualifying disposition requires the ESPP stock to be sold 2 years from the beginning of the offering period which appears to have been July 2019. That means the ESPP stock would have to have been sold after July 2021, if I have assumed correctly that July 2019 was the beginning of the offering period. 

Tax Implications of the ESPP Disposition
If shares are purchased under an employee stock plan, no income is reported as a result of the purchase. Instead, ordinary income and capital gain/loss are reported when the stock is sold.

For a disqualifying disposition:

• The stock sale will be treated as ordinary income.
•  Because this is a disqualifying disposition, your employer should include the bargain element*  in Box 1 of your 2021 Form W-2 as compensation.
• The Capital Gain/Loss** will be reported on Schedule D.
• You may receive a Form 3922 Transfer of Stock Acquired Through An Employee Stock Purchase Plan.

Reference:

*bargain Element = Fair Market Value (FMV) on the Purchase Date minus the Purchase Price paid 

Sale Price — (Purchase Price + Bargain Element) = **Capital gain/loss

[Bryan46]

Thanks Joe. 

I wasn't sure if both conditions need to be met or just one would satisfy the qualified disposition rule. 

1. Two years after the offering date

2. after one year from the purchase date. 

Now I am clear. Thank you:)

[JoeD_CPA_CFP]

You are very welcome.