Understanding Employee Stock Purchase Plans (ESPP) and Their Impact on Your Taxes
Employee Stock Purchase Plans (ESPP) are becoming increasingly popular, particularly in publicly-traded technology companies. With our extensive experience in handling these cases, we’ve encountered various scenarios on how ESPPs affect tax profiles and their representation on tax returns. This post aims to summarize some key aspects. We encourage your questions in the comments, and we’ll be glad to address them.
What is ESPP and How Does It Differ from ISOs?
Employee Stock Purchase Plans (ESPP), similar to Incentive Stock Options (ISOs), offer employees the opportunity to purchase company stock, often at a discount. There are two types of ESPP dispositions: qualifying and disqualifying. A notable difference from ISOs is that, even with a qualifying disposition in ESPP, part of your gain may still be reported as ordinary income. You will receive Form 3922 with details about your ESPP transactions.
Reporting ESPP on Your Tax Return
Compensation from ESPP sales is typically included in box 1 of your W-2 as total wages, but it may also appear in box 14. If you’re unsure whether this compensation is reflected in your W-2, it’s best to check with your payroll department.
Avoiding Double Taxation
If your W-2 includes ESPP compensation, report it as usual. To prevent double taxation, adjust the cost basis on your Schedule D when reporting the sale. Form 1099-B will show the original cost basis and sale proceeds. The adjustment amount is the compensation reported on the W-2. Platforms like E-trade often provide supplemental materials to help calculate the adjusted cost basis and actual capital gains.
Tax Rates and Capital Losses
The duration you hold the stocks impacts how gains are taxed: less than a year results in short-term capital gains tax, while holding for over a year leads to long-term capital gains tax. If you incur a capital loss after adjusting the cost basis, you can deduct a maximum of $3,000 against other ordinary income, with any remaining loss carried forward to future years.
Disclaimer
This information is not intended as tax, legal, or investment advice but for discussion purposes only. For personalized assistance, please contact us at [email protected] or through the details provided below.
