If we sold stock from an ESPP of a previous employer, how do I calculate the compensation to be reported?

[mcmack2501]

Since this is a previous employer, they do not report the compensation on a W-2.  But I'm not sure how to do it or if I have to.  I have all of the taxlot data of the sale from the broker but I'm not sure how this stock sale should be treated for tax purposes.

[TomYoung]

The sale of stock acquired from a a Qualified ESPP always has the potential for creating compensation income.  This compensation needs to be reported as such and the compensation gets added to the out of pocket cost to determine if the sale results in gain or loss.

There are two types of dispositions:Qualifying and NonQualifying.  A Qualifying disposition is one where the sale is:

    more than a year after the purchase of the shares, and
    more than two years after the grant date.

A disposition that doesn't meet both of the above tests is a NonQualifying disposition.

This is relevant as the way compensation is calculated is different between the two types of sales.

TurboTax has an interview that can help, but what you really should have is the Form(s) 3922 that you should have received with each lot.  Perhaps that information is there in the taxlot data the broker has supplied.

But if you have both Qualified and NonQualified sales you have to employ a work around in TurboTax to get things to come out properly.

Do you have both types of sales, or only one?

[mcmack2501]

I believe all my sales are Qualified.  I sold more than 2 years after offering date and more than 1 year after purchase date.  But I don't have a Form 3922 and can't find one on the broker's site.  All I can find is a "Consolidated Form 1099".  It contains taxlot data of each lot sold but doesn't reference 3922 anywhere on it.  It does have a column labeled "Ordinary Income Reported" so maybe that is the compensation?

[TomYoung · Accepted solution]

If you're confident that the "Ordinary Income Reported" is correct - it's not just the discount on your purchase price if the sales are Qualified - then I'd go with that.

If you had the Form(s) 3922 then the straight-forward way of recording the sale correctly and getting the compensation recognized would be to use the ESPP step by step interview.  It asks for the Form 3922 information, calculates the compensation, (if any), according to the special Qualified Sale rules, adds that to your out of pocket costs and reports the correct gain or loss on each sale.  It also accumulates the compensation and then at the end of the "Stocks, Mutual Funds, Bonds, Other" interview tell you how much it calculated and asks if that's the amount reported on the W-2.  If you answer "No" then it includes that amount on line 7 of the Form 1040.

But there's other ways of doing all this.

STOCK SALES

Look carefully at the 1099-B to see if basis is being reported to the IRS.  If it is then, probably, it's reporting only your out of pocket cost as basis and does not include the compensation element.  If that's the case then for each sale enter the 1099-B exactly as it reads then click on the "I'll enter additional info on my own " blue button.  On the next page enter the correct basis in the "Corrected cost basis" box.  The correct basis is (number of shares sold) x (correct per share basis, which includes the compensation per share)

TurboTax will report the sale on Form 8949 "as reported by the broker" but will put an adjustment figure into column (g) of the Form, a code "B" into column (f) of the Form, and the correct amount of gain or loss which includes the adjustment.

If the broker's not reporting basis then simply enter the correct basis for each trade.

COMPENSATION

You should be able to get your compensation correctly entered by:
Starting the "Miscellaneous Income, 1099-A, 11099-C" interview.
Starting the "Other income not already reported on a Form W-2 or Form 1099" interview.
Answering "Yes" on the "Other Wages Received" page.
Entering $0 on the "Wages Earned as a Household Employee" page.
Entering $0 on the "Sick or Disability Pay" page.
Answering "Yes" on the "Any Other Earned Income" page.
Ticking "Other on the "Enter Source of Other Earned Income" page.
Entering a description, e.g., "Qualified ESPP sale compensation",  and an amount on the "Any Other Earned Income" page.

Tom Young

[mcmack2501]

Thank you!