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:
| Grant Date | 4/1/2014 |
| Market Price on Grant Date | $10/share |
| Purchase Date | 9/30/2014 |
| Market Price on Purchase Date | $10/share |
| Shares Purchased | 1,000 |
| Discounted Price | $8.50/share |
Keep this information until you sell.
1099-B
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!
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Roger says
Thanks for posting so quickly!
Bruce Brumberg says
Very nicely illustrated examples for steps. Looks like the H&R Block version is doing this differently than the Turbo Tax. Seem like this H &R Block program is reporting the basis from the 1099-B, even when too low, then making adjustment in the column for gain/loss. From my understanding this is the way it should be reported with these steps. Does it seem like this program is doing it the accurate way?
Kevin says
Any suggestions on how to report an ESPP stock donation through HR block’s software?
Sam Seattle says
We use TaxAct Deluxe, and can’t figure out how to do this. Would you show us, please?
Harry Sit says
Please see Adjust Cost Basis for ESPP Sale In TaxACT.
Kevin says
Your example assumes you have a disqualifying disposition, and that makes it a simpler use case for H&R Block. If you have a qualifying disposition that did not appear on a W2 (mine did not), you need to inject compensation income elsewhere. I never found the place to inject that, but I didn’t look too hard. TurboTax Premier appropriately handles the compensation income.
Harry Sit says
That’s correct. I mentioned that the example was for a disqualifying disposition. It’s also consistent with my recommendation in Employee Stock Purchase Plan (ESPP) Is A Fantastic Deal to sell right away and not hold for a qualifying disposition.
I will look into how H&R Block handles a qualifying disposition when the compensation income didn’t appear on a W-2. If it did though, the adjustment for capital gains would be the same way; you just calculate the correct basis differently.
Sundar says
Harry: were you able to find out where to place in HR block amount for qualifying disposition when not reported in W2?
Harry Sit says
No. Maybe the best way is to contact the employer and have them include it on the W-2.
Sundar says
thanks harry. will check with employer. if that does not pan out any specific location in the underlying form(with new 1040 and schedule 1) for 2018.
ex: line 21 in schedule 1 which rolls up into 1040 Line 6?
John Dsouza says
Harry,
How can I check if the ESPP was included in my W2?
Harry Sit says
Add up all your pay stubs and compare with your W-2.
romans pogosovs says
Thank you Harry! Saved me from paying double tax! And great explaining I must add.
Carolyn says
What if we received a form 3922 from a sale of stock. Using H&R Block, where would this be entered? I never received a 1099-B. These were for shares sold in 2018.
I did also sell stock in 2017, but never received a 1099-B for that either. Would I contact the employer or broker?
Sergio says
Hi, Could you please help me, I have added on my federal tax form the adjustment for the cost basis for the ESPP stocks sold, however when I’m doing the California state, the software is showing the 1e cost (not adjusted) as the Federal basis and asking for a California adjustment; should I include the difference between the Box 1e cost basis and the adjusted cost basis from the supplemental information of the 1099B ?
For example, the 1099B box 1e has $5000 and adjusted cost on the supplemental information of the 1099B has $6000, for California the H&R block software show me in Capital gain/losses $5000 as the federal basis and asking for a California adjustment, should I include here $1000 ? (to match the adjusted cost basis)
Harry Sit says
My downloaded H&R Block software doesn’t ask me to adjust cost basis for California when everything matches federal. If I force it to go to the interview for California Schedule D, check a box that says “Transfer federal to California” (or something to that effect). After that just keep going to the next screen without entering any specific adjustment for California.
Megh says
I am facing the same issue as Sergio. Sergio what did you end up doing? Putting the difference in california adjustment?