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My employer offers an ESPP which allows us to purchase company stock at a 5% discount. I signed up for the plan, but was not interested in holding on to the shares for long, so I sold as soon as I acquired the shares for a ~5% gain, which translated to $1,009.

Now I'm filing my taxes. The $1,009 shows up on my W-2 on box 14 (other) with code ESPPDQ. So I'm assuming that the amount has already been reported to the IRS as regular income and the taxes withheld.

However, I now received a 1099-B from the broker that does not make a distinction between the purchase price at the 5% discount and the regular market price at the time of purchase, so when I input my 1099-B information into my tax preparation software, the $1,009 are been taxed as short-term capital gains.

So, is the income reported on my W-2 under code ESPPDQ already taxed, and I will be double taxed if I report the 1099-B at face value? Or is the income in my W-2 NOT taxed and should be treated as investment income and taxed as such separately?

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This, unfortunately, is a common problem. For whatever reason many brokerages report the discounted price as your cost basis. If you don't correct this, you will indeed be double taxed. Fortunately almost all tax software includes some mechanism for adjusting your basis. Here is an example with TurboTax. You should receive a Form 3922 with information that will help you determine the correct basis.

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  • highly knowledgeable answer!
    – Fattie
    Feb 16 '18 at 11:56
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    After reading on this topic, it looks like it is the IRS the one who made it a requirement beginning in 2013, for brokers to report the discounted price on the 1099-B, and the adjustment details in a separate, non-standard, supplemental form. This is totally insane in my opinion. I can imagine so many people being double taxed right now because of this decision. Feb 16 '18 at 21:53
  • @AxiomaticNexus I agree that's insane. Would you mind sharing your source? I assume it's for situations like mine where I have ESPP shares from a former employer. If I sell, will I get a W-2 from them? Or a 1099-MISC? If not, I wouldn't pay tax on the discount if my cost basis was the non-discounted price. But it probably screws over a good chunk of people with double taxes.
    – Craig W
    Feb 17 '18 at 14:42
  • @CraigW It actually started in 2014: sfgate.com/business/networth/article/… The article doesn't explicitly say that it only applies to former employers' ESPPs. I'm assuming it applies to everyone because having the discount taxed sometimes through form 1099-B and sometimes through W-2 would cause inconsistencies on taxation. The discount is intended to always be taxed as wages, to also account for payroll taxes and such, feature which form 1099-B does not support. Feb 17 '18 at 20:10

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