ESPP cost basis and taxes

Question

I participated in a qualified employee stock purchase plan (ESPP) and the offering period just ended. I put in $5000 and got a 15% discount on the price at the end of the offering period (no lookback provision unfortunately), so the stock is worth $5882. I intend to sell immediately so I will have a disqualifying disposition.

My question is, when I look at the cost basis through my brokerage, it shows it as $5000. So according to that, when I sell I will realize a short-term capital gain of $882 which is taxed at normal income rates. Will my employer also report the discount of $882 on my W-2? If so I will end up getting taxed twice on that money. Based on my research I was expecting my cost basis to be $5882 so essentially no capital gain, but regular income taxes on the $882 discount reported on my W-2.

Answer 1

If the $882 is reported on W2 as your income then it is added to your taxable income on W2 and is taxed as salary. Your basis then becomes $5882.

If it is not reported on your W2 - you need to add it yourself. Its salary income. If its not properly reported on W2 it may have some issues with FICA, so I suggest talking to your salary department to verify it is.

In any case, this is not short term capital gain. Your broker may or may not be aware of the reporting on W2, and if they report the basis as $5000 on your 1099, when you fill your tax form you can add a statement that it is ESPP reported on W2 and change the basis to correct one. H&R Block and TurboTax both support that (you need to chose the correct type of investment there).

Answer 2

This answer fills in some of the details you are unsure about, since I'm further along than you.

I bought the ESPP shares in 2012. I didn't sell immediately, but in 2015, so I qualify for the long-term capital gains rate.

Here's how it was reported:

2015 W2 from BigCorp

The 15% discount was reported on a W2 as

BOX 1. WAGES TIPS AND OTHER INCOME: $882

it was also mentioned twice in the info box (not all of my W2's come with one of these)

QUALIFIED DISPOSITION ESPP: $882

but also

DISQUALIFYING DISP OFFSET: $882

2015 1099-B from Etrade

This showed the sale trade, with my cost basis as the discounted price of $5000.

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And for interests sake, I also got the following in 2012:

• 3922 which documents the grant price, exercise price, fair market value and count of shares.
• Etrade transaction statement which contains actual purchase price for the lot.

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My conclusion

WARNING! This means that just going ahead and entering the numbers means you will be taxed twice! once as income and once as capital gains.

I only noticed this was happening because I no longer worked for the company, so this W2 only had this one item on it.

This is another example of the US tax system baffling me with its blend of obsessive compulsive need for documentation coupled with inexplicably missing information that's critical to sensible accounting.

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Update - I have now filed this year, and learned more:

The 1099 documents must (says the IRS since 2015) show the basis value as the award price (your discounted price).

So reading the form 8949:

Note: If you checked Box D above but the basis reported to the IRS was incorrect, enter in column (e) the basis as reported to the IRS, and enter an adjustment in column (g) to correct the basis.

We discover the number is incorrect and must adjust. The actual value you need to adjust it by may be reported on your 1099, but also may not (I have examples of both).

I calculated the required adjustment by looking at the W2, as detailed above.

I gleaned this information from the following documents provided by my stock management company (you should the tax resources section of your provider):

• Etrade's "Reporting The Sale of Employee Stock Purchase Plan" or
• Schwab's "Cost Basis Facts For Stock Plan Participants".