This type of transactions is common for our clients in San Francisco, and increasing in New York, Chicago, Los Angeles, Boston, Austin, and other cities where we have a large client base. Because of our extensive experience with these types of clients, we have seen many variations and scenarios of how the tax effects ultimately are shown on your return. We will attempt to summarize some of these below. Please feel free to leave comments with questions & we will be happy to address.
Employee Stock Purchase Plan (ESPP) is similar to Incentive Stock Option (ISO). There are two types of ESPP disposition. One is qualifying disposition and the other is disqualifying disposition. Unlike ISOs, you may still need to report part of your gain as ordinary income even if it is qualifying disposition. You will be provided Form 3922 for ESPP information.
Usually the compensation from the disposition will be included in the box 1 total wage of your W2 but this is not always the case. Based on our experience with clients, ESPP is generally reported in box 14 of your W2 as well. If you are uncertain whether the compensation has been included in your W2, you can confirm with your payroll department.
If the W2 includes the compensation from ESPP, you can simply report the W2 as normal. The most important thing that protects you from double taxation is to adjust the cost basis when you report the sale on your schedule D. You will have form 1099-B showing the original cost basis and proceeds from the sale. The adjustment amount is the compensation amount reported on the W2. If you are using E-trade, they usually issue Supplemental Material to assist you when figuring the cost basis and actual capital gain. If you hold the stocks less than one year, the gain will be taxed at short-term capital gain rate. If you hold the stocks more than one year, the gain will be taxed at long-term capital rate. If you have a capital loss after adjusting the cost basis, you can use $3,000 loss at maximum to deduct your capital gain against other ordinary income. Any remaining loss can be carried forward to future years.
None of this material is tax, legal, or investment advice and is only conversational material provided for discussion purposes only. We are happy to assist with this at our contact information below or through emailing firstname.lastname@example.org