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I was working for company X(Europe) where I was enrolled in ESPP (Employee Stock Purchase Program). After a few months when I sold the stock I received an offer from the X(US) "the mother company" to relocate to US. Of course I accepted the offer and now I have to file 1040NR/1040 forms. All this happened in the same 2010 tax year.

Questions: Will the IRS consider the ESPP income as US Effectively Connected income, because I guess that the stock was granted by X(US) while I was actually still working for X(Europe)? And do I have to specify this income in 1040NR form (according to irs.gov non-residents have to specify only US Effectively Connected Income)?

Obviously the stock does not show up in W-2 form with the past date because at that time I was actually still employed by X(Europe). The stock does not show up in any other forms as well (e.g. 1042-s, 1099).

So far I already had a consultation with one tax advisor who wants me to report this income in 1040NR. But I somehow do not agree with him and want to discuss whether this income indeed should be considered as US Effectively Connected Income at all...

I would appreciate any answer but would prefer those that can refer to irs.gov website or any other reliable source from US government.

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I would suggest to get an authoritative response from a CPA. In any case it would be for your own benefit to have at least the first couple of years of tax returns prepared by a professional.

However, from my own personal experience, in your situation the income should not be regarded as "US income" but rather income in your home country. Thus it should not appear on the US tax forms because you were not resident when you had it, it was given to you by your employer (which is X(Europe), not X(USA)), and you should have paid local taxes in your home country on it.

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If you haven't been a US resident (not citizen, different rules apply) at the time you sold the stock in Europe but it was inside the same tax year that you moved to the US, you might want to have a look at the "Dual Status" part in IRS publication 519.

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  • Yes I am going to use "First-year choice" which will allow me to fill tax return in dual-status for 2010. But anyway IRS would still consider me as non-resident from 2010, January 1st till 2010, November 1st, right? And the question is whether I should report ESPP income in 1040NR/1040 while I was non-resident at the time I sold the ESPP stock? I know that non-residents do not need to report regular income from trading stocks. But ESPP is slightly different, because IRS considers that as "compensation" from Employer.
    – user3233
    Commented Apr 4, 2011 at 18:17

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