Tax Center Global Tax Guide / Glossary / Discussion / Newsletters / About Us
Register Log In
myRecordsmyToolsmyClients
   Tax Center   
Reporting Company Stock Sales 2017 UPDATES!   
Form W-2 Diagrams   
Tax Changes 2003–2017   
NQSO Basics   
NQSO Withholding   
NQSOs: W-2s & Tax Returns   
ISO Basics   
ISO Withholding   
ISOs: W-2s & Tax Returns   
Restricted Stock Basics   
Restricted Stock Withholding   
Restricted Stock: W-2s & Tax Returns   
Section 83(b)   
ESPP Basics   
ESPP Withholding   
ESPPs: W-2s & Tax Returns   
SARs: W-2s & Tax Returns   
Global Tax Guide   

Annotated diagram of Schedule DTax errors can be costly! Don't draw unwanted attention from the IRS. Our Tax Center explains and illustrates the tax rules for sales of company stock, W-2s, withholding, estimated taxes, AMT, and more.

Tax Center: ESPP Basics

What are the eventual tax consequences of participating in a tax-qualified Section 423 employee stock purchase plan (ESPP)?

You are taxed only at sale, not when the shares are purchased. However, the rules for ESPP taxation are more confusing than those for stock options and restricted stock.

In general, participants in a Section 423 ESPP (which offers tax advantages) recognize ordinary income for some or all of the purchase-price discount (e.g. up to 15% of the market price) and recognize a capital gain or loss as the difference between their basis in the stock and the proceeds from the sale of the shares. Your specific tax consequences depend on whether you do or do not meet the holding-period requirements of Section 423 ESPPs, and how the stock price changes between the purchase and your eventual sale.

Example: Your company uses a 15% discount on the value of the stock on the first or last day of the offering period, whichever is lower. The stock price is:
  • $10 on the first day of the offering period
  • $18 on the last day of the offering period (your purchase date)
  • $24 when you sell

You sell the stock after meeting the ESPP holding-period requirement (two years from grant, one year from purchase).

  • You recognize ordinary income of $1.50 per share (15% of $10).
  • Your tax basis is $10 (ordinary income of $1.50 plus your purchase price of $8.50).
  • Your long-term capital gain at sale is $14 per share ($24 minus $10 tax basis).

For your tax return, you will need Form W-2 (whether you met or did not meet the holding periods) and Form 3922 from your company. For the details of ESPP tax-return reporting, including annotated examples of Form 8949 and Schedule D, see the Tax Center.

Print this FAQ: Printer icon
Share this FAQ:
Share this article on LinkedIn Share this article on Facebook Share this article on twitter
Return to list Next FAQ in list