The new IRS regulation for ESPP shares acquired in 2014 or thereafter requires adjusting the basis. Otherwise you will be double-taxed on the discount. Reader Roger asked me how to do it in H&R Block software. If you use TurboTax or H&R Block software, please read
When to Report
Before you begin, be sure to understand when you need to report when you have ESPP. You report when you sell the shares. If you only bought shares under ESPP but you didn’t sell during the tax year, there’s nothing to report yet.
Wait until you sell, but write down the full per-share price (before the discount) when you bought. If you have multiple lots, write down for each lot the purchase date, the closing price on the grant date and on the purchase date, and the number of shares you bought. This information is very important when you sell.
Let’s use this example:
You bought 1,000 shares on 9/30/2014. The closing price on the purchase date was $10/share. The closing price on the grant date was also $10/share. You bought at $8.50/share with the discount.
You would write down:
|Market Price on Grant Date||$10/share|
|Market Price on Purchase Date||$10/share|
Keep this information until you sell.
When you sell, you will receive a 1099-B from the broker in the following year. You will report your gain or loss using this 1099-B and the information you accumulated for each purchase.
Let’s continue our example:
You sold 1,000 shares from your purchase above on 10/5/2014 at $9.95 per share. After commission and fees, you netted $9,900. In 2015, you received a 1099-B from your broker showing a sales proceed of $9,900. The 1099-B shows the cost basis as $8,500, which reflects your discounted purchase price.
Because you didn’t hold it for two years after the grant date and one year after the purchase date, your sale was a “disqualifying disposition.” The discount is added as income to your W-2. This raises your cost basis. If you just accept the 1099-B as-is, you will be double-taxed!
Now let’s account for it in H&R Block software. I’m using the desktop version. Online interface is different.
H&R Block Software
Click on Federal -> Income. Scroll down to find “Sale of Stocks, Bonds, Mutual Funds, and Investment Property (1099-B)” in the Investments section. Click on the Go To link next to it.
You can import your 1099-B or you can add it manually. I’m showing manual entries.
The Reported on 1099-B box is automatically checked. Leave it checked. Enter a description. Enter the dates and numbers from the 1099-B. Date acquired is the date the shares were purchased. The cost basis on your 1099-B was reported to the IRS but it was understated. Don’t change it here directly.
The 1099-B I received shows the type of gain or loss and that the basis was reported to the IRS. Chances are yours does too.
Here you get a chance to put in the true cost basis. The market price was $10/share when these 1,000 shares were purchased. Your employer added the discount as income to your W-2. Therefore your true basis is $10 * 1,000 = $10,000. If you didn’t sell all the shares purchased in that lot, multiply the number of shares you sold by $10.
The type of gain or loss is shown on the 1099-B. It’s usually correct.
You are done with this entry. The summary here gives the impression that you are paying tax again on a $1,400 gain, but don’t panic. You are not.
You can verify by opening Form 8949. Click on the program menu Forms -> Open Forms, or click on the toolbar button Forms. Find Form 8949 and double click on it.
You will see the understated basis in column (e) with an adjustment code B in column (f) and a negative adjustment in column (g). After the adjustment you actually have a small loss on this sale, because you sold at $9.95/share, slightly lower than the $10/share market price on the purchase date, and you had to pay commission and fees.
If you didn’t do the adjustment and you just accepted the 1099-B as-is, you would pay capital gains tax again on the $1,500 discount you already paid taxes on through your W-2. Remember to do the adjustment!