Many public traded companies in U.S. offer qualified Employee Stock Purchase Plans (ESPP) to their employees. If you participate in the qualified Employee Stock Purchase Plan, you can purchase the company stock at a discount of up to 15%. The discount you received is treated as your compensation. However, you don't need to report the discount as compensation income at the time of purchase. You report compensation income and gain/loss from disposal when you sell or dispose the shares. The steps below will show you how to report sale of stock acquired through employee stock purchase plan on your tax return.
Step 1: Collect information needed for reporting.
1. Form W-2. You will need to check if your employer included the stock discount as ordinary income on your W-2, box 1.
2. Form 3922 - Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423c. You should receive a copy of Form 3922 from your employer by January 31 of the year following the transfer .You will need this form to calculate gain/loss from stock sale.
3. Form 1099-B.This form reports proceeds from stock sale.
4. Any letter or document from your employer or plan administrator that provides information for the purchase or sale of your employee stock purchase plan shares.
Step 2: Determine if your stock holding period was satisfied.
You satisfy the holding period requirement if:
- The stock was granted to you for more than two years and you hold the stock for more than one year after the stock was transferred to you.
- or you sold the stock to comply with conflict of interest requirements.
Go to Step 3-1 if you satisfy the holding period requirement.
Go to Step 3-2 if you don't satisfy the holding period requirement.
Step 3-1: Calculate gain/loss from the sale - Holding period requirement was satisfied.
Use information you collected from Step 1 to calculate gain or loss from the sale. Example 1 and 2 below present different tax treatment for gain or loss from sale. Use the example that applies to you.
Step 3-2: Calculate gain/loss from sale - Holding period requirement was not satisfied.
Use information you collected from Step 1 to calculated gain or loss from the sale. Example 3 and 4 below present tax treatment for gain or loss from sale. Use the example that applies to you.
Step 4: Check W-2 or related document from your employer to see if your employer included the ordinary income calculated on Step 3 as wage in box 1.
If the ordinary income is not included in box 1 of your W-2 form, you must report it as wage on Form 1040, line 7 and add the ordinary income to the cost basis of the stock sold (see Step 3).
If the ordinary income is included in box 1 of your W-2 form, you need to add the ordinary income to the cost basis of the stock sold so that your will not be taxed twice on this income (see Step 3).
You can use the example below as reference to check your W-2.
Step 5: Report the capital gain/loss calculated on Step 3 on Form 8949 or Schedule D.
Report the gain/loss on Part I of Form 8949 if you hold the stock less than one year, or Part II of Form 8949 if you hold the stock more than one year.
For more information about Employee Stock Purchase Plan, please see IRS Publication 525 and Code Section 423.
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