ESPP cost bases for 2014 taxes

Question

I participated in a qualified employee stock purchase plan (ESPP) and I'm trying to figure out the cost basis of my stock for tax purposes.

When I enrolled for the ESPP the stock price was $29.44, after the six month period the price was $31.71. I got the shares at a 15% discount of the lower value, $25.02, and paid $6556.29 for 262 stocks.

I've had these stocks for two years (Qualified Disposition) and sold them for $38.03, for a total of $9964.02.

What will my cost basis be? When I look at my W2, I see them mention "Qualifying ESPP Disposition" with the total ordinary income on it at the top but no specific entry in any of the boxes of the W2.

My brokerage account shows the following for this transaction. Proceeds -- 9964.02 Acquisition cost -- 6556.29 Ordinary income recognized -- 1156.99

Would my cost basis be a sum of the "Acquisition cost + Ordinary income recognized", or "Acquisition cost - Ordinary income recognized" or just "Acquisition cost"?

Answer 1

The cost basis is used for calculating the capital gain portion of your gains.

This should be what you paid for the shares plus the discount (that is taxed as ordinary income) and the remaining up to the proceeds will be capital gains

$6556.29 (acquisition cost) + $1156.99 (discount) + $2250.74 (capital gains) = $9964.02

You wouldn't want to set your cost basis to your acquisition cost because you would end up paying tax twice on the discount portion: once as ordinary income and a second time as capital gains

For 2014 tax fillings, brokerages are no longer required by the IRS to calculate the cost basis as including the ordinary income, so if you take the amount from the 1099b, you risk paying double tax on the discount

Answer 2

Your cost basis is how much you paid for the shares. You say

I got the shares at ... $25.02, and paid $6556.29 for 262 stocks.

so your cost basis is 6556.29, unless you've ever received any documentation that says you were supposed to reduce your cost basis.

That being said, the way to calculate tax on sales of shares obtained via ESPP is not the same as how to do it for regular shares. See either of these articles for help with that.