[Updated on January 28, 2024 with screenshots from FreeTaxUSA for 2023 tax filing.]
If your employer offers an Employee Stock Purchase Program (ESPP), you should max it out. You come out ahead even if you sell the shares as soon as you can. See Employee Stock Purchase Plan (ESPP) Is A Fantastic Deal.
After you sell the shares from the ESPP, part of the income will be included on your W-2. However, the 1099-B form you receive from the broker still reflects your discounted purchase price. This post shows you how to make the necessary adjustment on your tax return using FreeTaxUSA.
Don’t pay tax twice!
If you use other tax software, please read:
When to Report
Before you begin, be sure to understand when you need to report. You report when you sell the shares you bought under your ESPP. If you only bought shares 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 purchased multiple times, write down for each purchase:
- The purchase date
- The closing price on the grant date
- The closing price on the purchase date
- The number of shares you bought
This information is very important when you sell.
Let’s use this example:
You would write down:
|Market Price on the Grant Date
|$10 per share
|Market Price on the Purchase Date
|$12 per share
|$8.50 per share
Keep this information until you sell.
1099-B From Broker
When you sell, you will receive a 1099-B form from the broker in the following year. You will report your gain or loss using this 1099-B form and the information you accumulated for each purchase. Some brokers will supply supplemental information for your purchases.
Let’s continue our example:
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 do it in FreeTaxUSA.
Find “Stocks or Investments Sold (1099-B)” in the “Common Income” section under “Income” in the menu. Click on “Add an Investment Sale.”
Choose “Stocks, Bonds, Mutual Funds” as the investment type.
Choose “One at a time.”
Enter the numbers on your 1099-B as they appear. The cost basis on your 1099-B was reported to the IRS but it was too low.
Don’t make any changes here. Your broker sent this information to the IRS. It has to match.
Adjust Cost Basis
You have this opportunity to make an adjustment. Check the “Yes” radio button and the box for “The basis shown in Box 1e is incorrect.”
Enter your purchase cost plus the amount added to your W-2. When you did a “disqualifying disposition” your cost basis was the full value of the shares on the date of the purchase. The market price was $12 per share when you purchased those 1,000 shares at $8.50 per share. Your employer added the $3,500 discount as income to your W-2. Therefore your true basis is $8,500 + $3,500 = $12,000.
If you didn’t sell all the shares purchased in that batch, multiply the number of shares you sold by the discount price on the date of purchase and add the discount included on your W-2. For example, if you sold only 500 shares and your employer added $1,750 to your W-2, your corrected cost basis is:
$8.50 * 500 + $1,750 = $6,000
If you had a wash sale, your 1099-B form would indicate it as such. We didn’t have a wash sale in our example.
We’re done with one ESPP sale. Repeat if you sold more than once during the year.
Verify on Form 8949
We can verify that the adjustment makes it all the way to the tax form.
Click on the three dots on the top right above “Your Stocks or Investments Sold” and then click on “Preview Return.”
Scroll down to find Form 8949 in the popup. You see the negative adjustment in column (g).
If you didn’t make the adjustment and you just accepted the 1099-B as-is, you will pay capital gains tax again on the $3,500 discount you are already paying taxes through your W-2. Remember to make the adjustment!
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