How to handle case where only some of ESPP sale ordinary income is reported on W-2?

[TomYoung · Accepted solution]

"How to handle case where only some of ESPP sale ordinary income is reported on W-2?"

I assume that's the case because you sold stock in both nonqualifying and qualifying sales, and only the nonlqualifying sales' compensation income is on the W-2. 

TurboTax used to be able to handle this situation on the "Your Employer Stock Plan Results" page.  Prior to 2015 there was a box on that page where you could enter the amount of compensation actually reported on the W-2.  TurboTax would then take the difference - the correct amount it calculated minus the amount reported on the W-2 - and make an entry to be included on line 7 of the Form 1040 for that difference.  Now you have to deal with workarounds.

You have a few different ways of going here.

1) If you've entered all your trades then the first way is to write down how much compensation is being reported with each Disqualifying trade and then deleting the Disqualifying trades.  Re-enter the Disqualifying trade or trades on the default "1099-B" entry form and simply correct the basis figure(s) reported by the broker.  (Click the blue "I'll enter additional info on my own" button.  On the next page enter the correct basis in the "Corrected cost basis" box.That will allow you to add the missing amount of basis and TurboTax will show all this correctly on Form 8949.) 

The Disqualifying trade or trades is/are now correctly reported: the compensation element is reported on the W-2 and you've used the correct basis for the sale, or sales.

That will leave only the Qualifying trades having been entered using  the ESPP step by step process and the compensation calculated by TurboTax will only encompass those trades.  Then when you get to that "Your Employee Stock Plan Results" page you would answer "No."  TurboTax will then make the correct adjustment to line 7 of the Form 1040 and those trades will have the correct basis reported on Form 8949.


2) If you've entered all your trades then the other way you could handle this is leave things as they are and answer "Yes" to TurboTax's question about the amount reported on your W-2.  TurboTax will make no adjustment to line 7, but your trades will be correctly reported.  Then, you tell TurboTax about the line 7 adjustment needed for the Qualifying trades 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 and an amount on the "Any Other Earned Income" page.


3) Finally, another workaround is to enter the Disqualifying trades trades using the correct name of the employer and answering "Yes" to the "on the W-2?" question, then enter the Qualifying trades using a slightly different version of your employer's name and then answering "No" to the "on the W-2?" question.  That will get the Qualifying trades' compensation reported on line 7 of Form 1040. 

Tom Young

[MichaelDC]

Some of your stock sale price was a "disqualifying disposition." The difference between that and a qualifying disposition is how long you waited after the purchase date to sell. You probably also received a 1099-B from the broker when you sold.

You will have to report the sale of stock in TurboTax. The statement will probably report your investment basis (cost) accurately, but we're including an example and overly detailed explanation at the bottom to ensure you don't pay more taxes than you have to on the sale.

Disqualifying Disposition:

You sold the stock within two years after the offering date or one year or less from the exercise (purchase date). In this case, your employer will report the bargain element as compensation on your Form W-2, so you will have to pay taxes on that amount as ordinary income. The bargain element is the difference between the exercise price and the market price on the exercise date. Any additional profit is considered capital gain (short-term or long-term depending on how long you held the shares) and should be reported on Schedule D.

Qualifying Disposition:

You sold the stock at least two years after the offering (grant date) and at least one year after the exercise (purchase date). If so, a portion of the profit (the “bargain element”) is considered compensation income (taxed at regular rates) on your Form 1040. Any additional profit is considered long-term capital gain (which is be taxed at lower rates than compensation income) and should be reported on Schedule D, Capital Gains and Losses.

In this situation, you sell your ESPP shares less than one year after purchasing them.

Example:

Offering date: 1/01/2015

Market price: $30

Exercise (purchase) date: 6/30/2015

Market Price: $25

15 percent discount

Actual cost: $21.25

Actual sale date: 1/20/2016

Market price: $50

Commission paid at sale $10

Number of shares: 100

This is a disqualifying disposition (sale) because you sold the stock less than two years after the offering (grant) date and less than a year after the exercise date.

Because this is a disqualifying disposition, your employer should include the bargain element in Box 1 of your 2016 Form W-2 as compensation. The bargain element is calculated this way:

1. Subtract the actual price paid from the market price at the exercise date
2. Multiply the result by the number of shares: ($25 - $21.25) x 100 = $375

Even if your employer didn't include the bargain amount in Box 1 of Form W-2, you must report this amount as compensation income on line 7 of your Form 1040.

You must also show the sale of the stock on your 2016 Schedule D, Part I for short-term sales because there was less than one year lapsed between the date you acquired the stock (June 30, 2015) and the date you sold it (January 20, 2016).

The sales price you report on Schedule D is $4,990 and the cost basis is $2,500. Your short-term capital gain is the $2,490 difference ($4,990 - $2,500).

How did we come up with these amounts?

The gross sales proceeds from selling the shares is the market price at the date of the sale ($50) times the number of shares sold (100), or $5,000. You then subtract any commissions paid at the sale ($10 in this example), to arrive at the sales price amount of $4,990 reported on Schedule D. Your broker will show this amount on Form 1099-B that you'll receive at the beginning of the year following the year you sold the stock.

The cost basis is the actual price you paid per share (the discount price) times the number of shares ($21.25 x 100 = $2,125), plus the amount reported as income on line 7 of your form 1040 (the $375 bargain element we calculated above), for a final cost basis of $2,500.