Tuesday, April 1, 2008. 3:38 pm. Posted by Josh.
This appears to be a hot topic (at least for my little blog). I guess I'm not the only person out there who realized there was more to an ESPP than meets the eye.
Monday, April 14, 2008. 4:05 pm. Posted by Josh.
Alright! My first post to go over 500 views!
Hope people are finding it interesting!
I will be curious to see what happens after tomorrow (Tax deadline). Will the view drop significantly?
Thursday, April 24, 2008. 10:46 am. Posted by Josh.
Looks like I was right. Interest in this post has dropped off quite a bit since the tax deadline. Now I will be interested to see if it picks up again next tax year.
Saturday, April 26, 2008. 5:25 pm. Posted by Taxed.
Thank you very much for your article on calculating ESPP taxes. Your spreadsheets are wonderful! Thank you for sharing them.
Monday, April 28, 2008. 1:24 pm. Posted by Josh.
My pleasure. My goal of writing the article was to give people the benefit of the research I had already done on the topic. Glad you were able find it useful.
Sunday, May 4, 2008. 12:06 pm. Posted by David.
How about commissions/fees? Shouldn't these be subtracted from the sale total?
Monday, May 5, 2008. 10:54 am. Posted by Josh.
Yes, you're correct. Your proceeds from the sale would be your sales dollars - commissions/fees - purchase cost. I think most brokerages supply you with proceed numbers that already have the commissions subtracted. I know TDAmeritrade and Fidelity do.
Thursday, October 2, 2008. 3:23 pm. Posted by PlayHard-PlayFair-HaveFun.
Very well written. I've been meaning to read this, and just got around to doing so today. I hope you didn't explain it so well that people report correctly and reduces another revenue source for IRS (and State) tax auditors. ;}
Tuesday, October 7, 2008. 1:01 pm. Posted by Josh.
That might be, but the way I understand it, the IRS has plenty of money. In fact, I got a call from a "government worker" the other day saying I was going to get $5000 just for paying my taxes on time! Yeah right. To read about this phone scam, see my post:
Phone Scam Claims Government Wants To Give You $5,000 For Paying Taxes On Time
Sunday, February 15, 2009. 1:46 am. Posted by guitarmom.
Thanks for your well-written explanation of tax calculations for ESPP sales. This explains things very well when you sell your stock for a profit. But what happens when you sell ESPP stock at a loss?
Is the loss a Capital Loss or a reduction of Ordinary Income, or some hybrid of the two? (Our sale is a qualifying sale.)
Monday, February 16, 2009. 1:37 pm. Posted by Josh.
I believe the correct answer is to treat it all as a capital loss and not report any ordinary income.
From IRS Publication 525:
Any excess gain is capital gain. If you have a loss from the sale, it is a capital loss, and you do not have any ordinary income.
Also see the reply in this forum:
I am not a tax professional, so this information should not be taken as tax advice. I'm simply stating how I have handled the situation.
Sunday, April 12, 2009. 6:57 pm. Posted by uncle sam's servant.
your explanations confirmed my understanding of handling espp sales. thanks! what i find annoying is one can't really tell if the company includes the discounted amount in box 1 of the w-2 (my box 14 lists a totally different thing casdi amount). an indication that amount has been reported in w-2 is the difference between box 1 and box 3, but i guess a call to payroll definitely gives the right answer.
Tuesday, April 14, 2009. 2:31 am. Posted by DM.
Thanks for this informative post, I keep relearning this stuff every tax season, good to find it all in one place.
Wednesday, April 15, 2009. 10:56 pm. Posted by Mack.
Very good summary - succinct and clear. It helped with my 2008 taxes and made me realize that I overpaid in prior years.
Tuesday, April 28, 2009. 10:04 am. Posted by Josh.
If you over paid in previous years, you may want to consider re-filing for those years. I re-filed 3 years and ended up getting about $1000 back. Well worth the few hours it took to do the paperwork.
Saturday, May 16, 2009. 1:10 pm. Posted by Scott.
I have the irs trying to add the entire amount of employee stock that I sold in 2007, but I have already paid taxes on this money because it is an after tax deduction. My total capital gain was only $385. Does the irs have the right to add all of my $2900 on to my tax return or just the gain?
Tuesday, December 29, 2009. 2:47 am. Posted by yazehu.
First off, great post! I've been trying to learn about this topic for some time and you managed to boil it down very nicely!
One quick question, in the section on Qualified Distribution, you refer to Market Price on Offer Date which you explain as being "the market price per share on the beginning of the offer date". Can you clarify this further? Given that ESPP purchases are made bi-annually (at least in the program that I'm enrolled in), are you referring to the price at the beginning of the 6 month period? Or something else?
Monday, April 12, 2010. 7:13 pm. Posted by John,.
2 Comments - If it is a Qualifying disposition (>1yr after purchase AND >2yrs after offer date) then any loss is LTCL, BUT if it is disqualifying, then you still have OI on the discount, even if you lose money!
Also, TurboTax (and you) and others I have seen say that your OI is Either 15% off the Market price at Offer date Or Sale price - Purchase price, whichever is less. However, this has never seemed correct to me. Let me give an extreme example.
The Market price at the beginning of the offering period, the Entry price is say $100. Now the stock tanks, and 6 months later your company uses your money to buy some at 10% off of the current market price of $20, or for $18. Your REAL discount is $2/share - remember this! Now another say 3 years goes by and you sell your stock for $110! You want to calculate what is OI and what is LTCG. According to what this Blog says and Turbo Tax says you have two choices for Ordinary Income:
Monday, April 12, 2010. 7:14 pm. Posted by John.
[[[MktOffer*Discount]) = $12. Here it makes sense because this matches your actual discount. You can make a more extreme example and I have seen it argued both ways, but paying more than the actual discount in OI just doesn't make sense to me.
(YMMV - Not professional Tax advice!)
Monday, April 12, 2010. 7:31 pm. Posted by John again....
It cut out some of what I posted, so I'll try again:
Actual Gain per share = Sell Price Per Share - Discounted Purchase Price Per Share or $110 - $18 = $92, LTCG is 0$ -OR- Discount = Market Price on Offer Date * Discount Rate% = $100 * 10% = $10! Now you really only received a $2 discount, so IMHO that should be the OI per share, not $10; and the other part of the gain, $90 should be LTCG. If you change the example so that the Market-Offer price is BELOW the purchase price then the 'problem' goes away and it all makes sense: $100 Market-Offer, You buy later at say $120 - 10% or $108. You sell 3 years later at $150. OI is LESSER or $42 the Actual gain -OR- $12 MktOffer*Discount = $12. Here it makes sense because this matches your actual discount.
Monday, April 12, 2010. 7:32 pm. Posted by John,.
You can make a more extreme example and I have seen it argued both ways, but paying more than the actual discount in OI just doesn't make sense to me. I don't really think Pub 525 is that clear on this situation - there is no example there.
(YMMV - Not professional Tax advice!)
John (part 3)
Thursday, June 17, 2010. 2:30 pm. Posted by ESPP_Participant_MY.
I came across your site looking for clarifications for the ESSP DISQ Dispositions and found your Excel file very usefull. You may want to update the formula to include Capital Losses for Qualified dispositions so that formula does not produce negative ordinary income.
Thanks again for the writeup and the excel spreadsheet.
Tuesday, January 4, 2011. 3:25 am. Posted by Charlie.
I just noticed these posts, which appear to be about 9 months old and not active anymore. I'm not sure if anyone is still responding to questions but if so I have the same question that was originally asked by John about the treatment of the ESPP discount as ordinary income. It does not appear that John's question was ever answered.
Like John, it also does not seem correct to me that the amount of discount that you must report as ordinary income is based on the offer price in the case when the stock price decreases and the actually discount you receive is based on a purchase price that is lower than the offer price. I also haven't found any clear documented evidence that this is in fact the case. Does anyone know for sure whether the ordinary income received from the 15% discount is always calculated based on the original offer price and never based on the actual discount that was received?
Friday, March 4, 2011. 6:40 am. Posted by Anonymous.
Thanks for posting this! This explains it better than any place I've been so far! Think you just saved me from having to get a tax professional to help me figure it out.
Tuesday, April 19, 2011. 11:12 pm. Posted by stock tips.
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Friday, April 13, 2012. 7:51 pm. Posted by DanKline.
As ESPP_Participant_MY mentioned, I think the formula for O2 (discount amount) should be updated to not go negative. After doing this, i was able to match my employer's (major corp) payroll department calculation. Here's updated O2 calculation:
Wednesday, March 27, 2013. 9:05 pm. Posted by Tammy.
Thank you- this was really helpful!
Wednesday, February 4, 2015. 3:32 pm. Posted by Johnny Taxpayer.
Although this is the most clear and simple explanation I've seen yet... it still makes my head explode. And it seems Fidelity's terminology does not jive with Turbo Tax... I had to "rig" the forms to get it to look right, but it makes me uncomfortable. You had me up until the part about adding money onto my W2 income? You mean tack the added up "Ordinary Income" numbers on my Fidelity sheet to my adjusted gross income, so that number will now look different than what's on my W2 Box 1? It appears Turbo tax wanted to put that amount into my INTEREST section, and I'm lost. Long story short... I'm calling an accountant!