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I have a question about my 1099-B form regarding ESPP sales. My company allows me to buy shares at a 15% discount through an ESPP program. I buy-and-hold for 1 year 1 day so my sales are taxed at long-term rates. My question is about my 1099-B cost basis.

  • Looking at my 1099-B form, the "Net Proceeds" is checked at the top for Reported to IRS.
  • Box 1d (Proceeds) has $3,555
  • Box 1e (Cost or other basis) has $3,048
  • Box 2 says Long Term

This implies a total of $507 capital gains.

However, the next page of the form has line-item details provided for information only. There, it says:

  • Proceeds: $3,555
  • Cost or other basis: $3,582
  • Long Term
  • Total loss: (27).
  • Ordinary Income (USD): $534
    • ^^^^ where did this number come from, and what does it represent?

My question is which cost basis is the IRS aware of -- the one before the 15% discount (which seems to be the one shown in the line-item detail, or the one after the 15% discount which seems to be at the actual 1099-B form).

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The following assumes you have a qualified ESPP and you had a disqualifying disposition because you sold less than 2 years from the start of the period.

The first cost basis (the lower one) is the one reported to the IRS. However, manually adjusting your basis is common, especially for ESPPs, and you shouldn't hesitate to do so. Most tax software has this capability. There must be a regulation that says brokerages have to report your discounted price as the cost basis on Form 1099-B, even though it should be the fair market value on the purchase date.

Note that you should have an entry on your W-2 corresponding to the amount of your discount ($534), and if not, you'll need to add it as miscellaneous income.

Also note that since you had a loss, it wasn't really necessary to hold for a year. If anything a short-term capital loss is slightly more useful than a long-term capital loss.

  • can you please elaborate where on the W2 I should see the $534? I’m a little confused by it... if I’m buying shares at a discount with after tax dollars, the amount discounted is still taxed at ordinary income? – David Mar 7 at 15:49
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    In most cases, the government treats the discount the company gave you like regular income, just as if the company gave you a cash bonus. When I did an ESPP several years ago, it was listed on my W-2 under line 14 (other) as DISQ - SO, which I assume to mean disqualifying disposition - stock options (even though they are really not stock options). – Craig W Mar 7 at 20:34
  • thanks. I don't see anything on my W2 regarding ESPP, so I'll report Misc income. Quick question, isn't adjusting the cost basis to the higher amount (before discount), but reporting ordinary income on the amount discounted essentially doing the same thing as pretending the cost basis is the amount after the discount. Or worse, it's being taxed at higher rates than long-term gains. – David Mar 8 at 1:12
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    Yes, by making these two adjustments you will pay more in taxes than you would otherwise. But it's the correct thing to do. – Craig W Mar 8 at 1:40

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