How to handle the sale of ESPP shares and additional common stock shares purchased from reinvested dividends after employment ceased

For 13 years, I purchased 406.603 ESPP shares during company employment.  After I quit the company, I continued to hold the shares. I purchased additional shares of common stock under the direct stock purchase plan (DSPP) with reinvested dividends. All the shares were consolidated into one account, and I sold all 463.901000 shares in 2010.  I am using TurboTax Premier.  Do I report the 406.603 shares as ESPP, recording the individual transactions.   How do I report the DSPP shares purchased with reinvested dividends?
  • Was the ESPP a section 423 qualified plan?  (Often the case, but check your paperwork.)  Were the ESPP shares purchased at a discount off market price?  How long has it been since you left the company?  Basically, you would enter each ESPP purchase as a separate entry, but what you enter depends on the answers to the above.

    For the DSPP shares, the situation is straightforward.  Just enter each reinvestment as a separate entry.  Your cost basis is the the fair market value per share times the number of shares purchased.  If a FMV isn't listed on your statements, then use the price per share.  Your sales proceeds is the number of shares times the price per share at the time of the sale.  You will also add a proportionate share of the brokerage commission to your cost basis if the 1099-B hasn't already subtracted the commission and reported a net rather than a gross receipt.
  • Thank you hbl3973.  I'm fairly sure that it was a section 423 qualified plan since it was an IBM ESPP. It's been 10 years since I left the company. The shares were purchased at a 15% discount. I am using Turbotax Premier software so I am reporting for each purchase, the number of shares, the price I paid for each share, and the market value of each share. Is the cost basis merely the total of all of my purchase costs?  

    I sold all my shares, ESPP and common stock shares, all at the same time, and I received only one 1099-B.  I'm  still confused about the common shares that were purchased with reinvested dividends associated with the ESPP shares.  In Turbotax Premier,  once I finish entering each ESPP purchase, the program asks me if I also  reinvested dividends.  I did, but to purchase common stock shares, not ESPP shares.  So should I continue to enter reinvestment information s part of the ESPP investment sale or report  the reinvestments as a separate investment sale?  I hope my questions are clear.  I really appreciate your help. Thanks again.
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Yes, your cost is just the some of all your purchase costs. It appears you don't have any buy commissions to add in to the cost.
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    TurboTaxNeil is right insofar as (s)he has gone, but is missing some important points.  (My wife has been in the IBM Dividend Reinvestment Plan since 1984, so I am intimately aware of the details of that plan.  My father paid for my Princeton education with shares acquired in his ESPP.)  First, with respect to the DSPP reinvested dividends (or any reinvested dividends) you do add up the amounts you paid for those reinvested shares.  This is the gross dividend minus the 2% reinvestment fee, i.e. the net amount invested.  You need to separate those acquired no more than one year before the sale (short term) from those acquired before that date (long term).  You report each as acquired on a date of "VARIOUS" and tell TurboTax which batch was short term and which was long term.

    TTNeil, however, neglected to consider the proper handling of the 15% discount from the 423 qualified plan.  (That discount was changed to 5% in 2005, after you left the company.)  IBM currently uses two purchase periods each year to accumulate funds to make purchases and I'll assume that was the case back when you participated.  The first period starts on January 1 and extends to June 30.  The second period starts on July 1 and extends to December 31.   Because you have held all your ESPP shares longer than 18 months, you need to recompute the market discount for each batch.  For those acquired based on a June 30 market price, you need to look up the closing NYSE stock price on the first business day after the prior January 1.  For those acquired on December 31, it is the first business day on or after the prior July 1.  http://www.ibm.com/investor/financials  gives you one online source for those data.  You will also have to adjust these market prices downwards by a factor of 2 for those acquired prior to 5/11/99 and by a further factor of 2 for those acquired prior to 5/10/97 to account for the 2-for-1 stock splits that occurred in the late '90s.

    OK, now that you have these numbers, you multiply the number of shares acquired in that purchase period by the market price per share at the beginning of those periods, that you just looked up to compute the adjusted cost basis of those shares.  If your selling price was greater than the adjusted cost basis, your gain is the increase above that cost basis and you also report an ordinary income equal to 15% of that adjusted cost basis.  If your selling price was less than the adjusted cost basis, you still report a gain (or loss) relative to the adjusted cost basis, but the ordinary income to report is the maximum of zero and the difference between the actual sales price and 85% of the adjusted cost basis.  In principle, TurboTax Premier can handle this correctly, but my experience last year was that most folks entered incorrect figures or choices.  By following the above, admittedly rather a chore, you can either crosscheck TurboTax or bypass it and simply enter the correct figures.  If you bypass, then for the ordinary income, make up a fictitious W2 with employer "IBM ESPP" and enter a wages equal to the total of the ordinary income amounts from each purchase period.  The IRS is perfectly happy to have you report MORE income than what shows up on the W2's they receive.  It is the reverse that triggers red flags.
    • Thanks to both TurboTaxNeil and hbl3973 for your advice.  I do have a few follow-up questions.  First re: the reinvested dividends, I'm not completely clear about whether I report the common stock purchases through reinvested dividends as part of the ESPP reporting or as separate common share purchases (long terms and short term).  Please clarify.

      For hbl3973 specifically, I have detailed ESPP records,going back to the beginning of my purchases, and for each purchase which was made 2x/month, I have the following data: the nmber of shares, purchas price per share, total purchase amount, and total market value.   I have used an Excel spreadhsheet to adjust market prices and the number of shares based on the 2-for-1 stock splitting.  I have entered the data into ESPP section of the TurboTax Premier program.  The purchase prices/share vary quite a bit--I don't see any indication of the two purchase periods you refer to and I'm afraid I don't understand why there is the corresponding need to recompute the market discounts for each batch of shares and adjust the cost basis.
    • The reinvested dividends are not part of the ESPP but separate common share purchases.

      As to the ESPP shares, first are you absolutely certain that you _purchased_  shares twice a month or was money deducted from your biweekly paycheck and accumulated towards purchase of ESPP shares at the end of each 6 month accumulation period?  All the online info I gleaned said that the IBM ESPP was a twice-yearly purchase.  You had better check your paperwork for the plan you were in to see if it was, indeed, a section 423 qualified plan.   In any event, the tax law for section 423 qualified ESPP plans dictates that after two years from the start of the purchase period over which funds began to accumulate for purchases, the amount of ordinary income attributed to a sale changes from the lesser of the market discount you received and the actual gain you got at the sale to the same calculation but with the market discount you would have received had those shares been acquired on the first day of the purchase period instead of the last day.  Your capital gain is the difference between your purchase price plus the relevant market discount income and your sales price.  In the event that share prices increased during the accumulation period, which is often the norm, this works to your benefit.  However if they decreased, you usually end up paying more ordinary income tax and less capital gains tax.
    • Thank you very much hbl3973 for the additional information.  I checked my records again, and they seem quite clear in reflecting quarterly purchases of ESPP stock, but I will call to double-check on this and the 423 qualified plan issue.
    • Thank you hbl3973 for shedding some light on how the sale of reinvested dividend shares in an ESPP are treated. It wasn't intuitive in Turbotax, the dialog that asks about reinvested dividends still seemed to require grant and execution data, which did not make sense to me, since the dividends would derive from multiple grants. I've reported income from rental real estate and MLP K-1s, but ESPP reporting has been more difficult. Having to enter the sale of each purchase lot was a pain.
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