How to Report ESPP on Your Tax Return

Employee Stock Purchase Plans (ESPPs) offer workers an opportunity to buy company stock at a discount, making them an appealing benefit for employees who want to invest in their company’s success. However, these plans come with specific tax implications that can be complex to navigate.

Accurate reporting of ESPP transactions on your tax return is key to staying compliant and optimizing your tax situation. Below, we break down the essential elements of reporting ESPP transactions.

Purchase Price, Discount, and Basis

Understanding the purchase price, discount, and basis is crucial for accurate tax reporting. The purchase price is the amount paid for the stock, often discounted by up to 15% from the market price, as permitted under Section 423 of the Internal Revenue Code. The discount is calculated based on the stock’s price at the beginning of the offering period or the purchase date, whichever is lower.

The basis of the stock is the actual purchase price, including the discount. For instance, if the stock’s market price is $100 and the discount allows you to buy it for $85, your basis is $85 per share. This basis is used to determine any gain or loss when you sell the stock.

Qualifying vs. Disqualifying Dispositions

The distinction between qualifying and disqualifying dispositions determines how ESPP income is taxed. A qualifying disposition occurs when the stock is sold at least two years after the offering date and one year after the purchase date. Gains from qualifying dispositions are generally taxed as long-term capital gains, which are taxed at favorable rates.

A disqualifying disposition happens if the stock is sold before meeting these holding periods. In this case, the discount received at purchase is treated as ordinary income and reported on your W-2 form. Any additional gain or loss from the sale is treated as a capital gain or loss.

Calculating Reportable Income

The type of disposition—qualifying or disqualifying—affects how you calculate reportable income. For qualifying dispositions, the income component is the lesser of the actual gain (sale price minus purchase price) or the discount received on the grant date. This amount is taxed as ordinary income, while any additional gain is subject to capital gains tax.

For disqualifying dispositions, the discount is taxed as ordinary income. The remaining gain or loss, calculated by subtracting the adjusted basis from the sale price, is treated as a capital gain or loss. Keeping detailed records of purchase dates, sale dates, market prices, and sale proceeds is essential for accurate reporting.

Tax Forms and Schedules

Reporting ESPP income involves several tax forms and schedules, each serving a distinct purpose.

Form W-2

Form W-2 reports the ordinary income from disqualifying dispositions. The income from the discount is included in Box 1 as part of total wages. Verify that this amount matches your records to avoid discrepancies. Social Security and Medicare taxes withheld on this income are also reflected on the W-2.

Form 1099-B

Form 1099-B, issued by brokers, reports the proceeds from ESPP stock sales. It includes key details such as the sale date, sale price, and brokerage fees. These details are necessary for calculating capital gains or losses. The form also indicates whether the transaction is short-term or long-term, which determines the applicable tax rate.

Form 8949

Form 8949 is used to report capital asset transactions, including ESPP stock sales. It lists each transaction, showing the date acquired, date sold, cost basis, and sale proceeds. Adjustments may be needed if the cost basis on Form 1099-B doesn’t reflect the ESPP discount. Once completed, the totals from Form 8949 are transferred to Schedule D.

Filing Details

Filing ESPP transactions on your tax return requires careful reconciliation of the information reported on Form W-2, Form 1099-B, and Form 8949. Brokers often don’t adjust the cost basis on Form 1099-B to account for the ESPP discount, so you must manually adjust the basis on Form 8949 to reflect the actual purchase price.

For disqualifying dispositions, the ordinary income from the discount is already included in your W-2. However, you still need to report the sale proceeds and adjusted basis on Form 8949 and Schedule D to accurately reflect the capital gain or loss. Maintaining precise records of your ESPP transactions ensures your return is complete and correct.