Frequently Asked Tax Questions And Answers
Keyword: Employee Stock Purchase Plan
10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
How do I calculate the cost basis of the shares that have split and are
later sold from my employee stock purchase plan?
You need to determine what your basis is in the company stock on the date of the
split. The new shares assume part of your basis in the company stock on that date.
You must divide the adjusted basis in the old stock by the number of shares of old
and new stock. The result is your basis for each share of stock.
For example, if you owned two shares of company stock with a basis in one at $30
and the other $45, and the company declares a three for one stock split, you now have
six shares of stock. Three of the shares will have a basis of $10, and three will
have a basis of $15.
Because this is an Employee Stock Option Plan, you may have to report some or all
of the gain on the sale of this stock as ordinary income (wages). For more information
about employee stock option plans, see Publication 525 , Taxable
and Nontaxable Income.
References:
Do I report the buying of stock?
Ordinarily, you do not have to report the purchase of stock, only the sale of stock.
However, if you exercise a nonstatutory stock option, a type of stock option granted
by an employer, you may have income to report in the year of exercise (the excess
of the fair market purchase value of the stock less the exercise price) if your rights
in the stock are substantially vested at the time of exercise, see Publication 525, Taxable
and Nontaxable Income, for further information.
References:
How do I report an employee stock purchase plan on my tax return?
If your stock option is granted under an employee stock purchase plan, you do not
include any amount in your gross income as a result of the grant or exercise of your
option. When you sell the stock that you purchased by exercising the option, you may
have to report compensation and capital gain or capital loss. For additional information
on tax treatment and holding period requirements, refer to Publication 525, Taxable
and Nontaxable Income.
References:
How do I determine the cost basis of stock bought through an employee stock
purchase plan (ESPP)?
Your starting basis is what you paid to buy the shares (option or exercise price).
This amount is increased by the compensation income amount, if any, you must declare
on your income tax return when the stock is sold. Sales commissions can also increase
the basis in your stock but will not affect the amount of compensation that must be
declared.
Under the employee stock purchase plan rules, if you had an option to purchase
the stock at a discount, the amount of compensation income realized when you sell
the stock depends on whether holding periods are met and whether you purchased the
stock at a discount.
To satisfy the holding period requirements, you must hold the stock for at least
one year after its transfer to you upon purchase and for two years after the option
is granted. If either of these holding periods are not met, then you have not met
the holding period requirements.
If the holding periods are met, the compensation income is the lesser of:
the amount by which the fair market value of the stock at the time you are granted
the option exceeds the option price, or
The amount by which the fair market value of the stock at the time you sell it
exceeds what you paid for it.
If they are not met, the compensation income is the amount by which the fair market
value of the stock, when vested, exceeds what you paid for it. The compensation income
should be included as wages on your Form W-2.
For more information, refer to Publication 525, Taxable and Non-Taxable
Income.
References:
I received an incentive stock option from my company, is this taxable?
If your option is an incentive stock option, you do not include any amount in your
gross income at the time the option is granted, or at the time you exercise it. However,
you may have income for Alternative Minimum Tax in the year you exercise the option.
If the special holding period requirements are met, income or loss from the sale of
the stock is treated as a capital gain or loss. However, if you do not meet the special
holding period requirements, you may have compensation income. For further information,
refer to Publication 525, Taxable and Nontaxable Income
References:
I purchased stock from my employer under an employee stock purchase plan.
Now I have received a From 1099-B from selling it. How do I report this?
If the special holding periods are met, generally treat gain or loss from the sale
of the stock as capital gain or loss. However, you may have compensation income if:
The option price of the stock was below the stock's fair market value at the time
the option was granted, or
You did not meet the holding period requirement.
The holding period requirement is that you must hold the stock for more than 2
years from the time the stock is granted to you and for more than 1 year from when
the stock was transferred to you. If you do not meet these holding period requirements,
there is a disqualifying disposition of the option. The compensation income that you
should report in the year of the disposition is the excess of the fair market value
of the fair market of the stock on the date the stock was transferred to you less
the amount paid for the shares.
If the holding period requirement is met, but the option price is below the fair
market value of the stock at the time the option was granted, you report the difference
as compensation income (wages) when you sell the stock. Generally, this compensation
income is the lesser of the excess of the fair market value on the date of the disposition
less the exercise price OR the excess of the fair market value of the option when
granted less the exercise price.
If your gain is more than the amount you report as compensation income, the remainder
is a capital gain reported on Form 1040, Schedule D (PDF).
If you sell the stock for less than the amount you paid for it, your
loss is a capital loss, and you do not have ordinary income.
For more information, refer to Publication 525, Taxable and
Nontaxable Income, and Publication 551, Basis of Assets.
References:
Where on the tax return do I enter the compensation income I had from the
sale of stock that I purchased under my employer's stock purchase program?
The compensation income is reported on line 7 (wages, salaries, tips, etc.) of
Form 1040. It is added to the stock's basis used when determining capital gain or
loss on the sale of the stock. Any capital gain or loss on the stock sale is reported
on Form 1040, Schedule D (PDF), Capital Gains and
Losses.
References:
Is the Internal Revenue Code limit of $25,000 per calendar year for stock
bought through an employee stock purchase program (ESPP) based on the discounted purchase
price or the higher stock value?
Under the terms of an employee stock purchase plan, you cannot accrue the right
to purchase more than $25,000 of stock, valued at fair market value on the day the
option is granted, in any one calendar year. The limit is not based on the purchase
price.
References:
- Internal Revenue Code section 423 (b)(8)
Are incentive stock options subject to alternative minimum tax, and if so,
how do I determine the basis for the stock?
A taxpayer generally must include in alternative minimum taxable income the amount
by which the price paid for stock received pursuant to the exercise of an incentive
stock option is exceeded by the stock's fair market value at the time his rights the
stock are freely transferable or are not subject to a substantial risk of forfeiture.
Increase your alternative minimum tax basis by the amount of the adjustment. Your
basis for regular tax is not affected by the adjustment.
If a taxpayer acquires stock pursuant to the exercise of an incentive stock option
and disposes of the stock in a disqualifying disposition in the same taxable year,
the transaction is subject to regular tax, and the alternative minimum tax does not
apply. Refer to Internal Revenue Code 83, Internal Revenue Code 56(b)(3), and Internal
Revenue Code 422(c)(2). For more information, refer to
Instructions for Form 6251, Alternative Minimum Tax- Individuals.
References:
-
Instructions for Form 6251, Alternative Minimum
Tax- Individuals
- Internal Revenue Code 83
- Internal Revenue Code 56(b)(3)
- Internal Revenue Code 422(c)(2)
I purchased stock through an employee stock purchase plan at my work which
split three months later. Three months after that, I sold the stock at a gain. How
does the split affect how I report the stock sale on my tax return?
With either of the two types of statutory employee stock option plans, there is
no income as a result of the granting of the option or the exercising of the option
(purchasing stock). These two types of plans are the employee stock purchase plan
and the incentive stock option plan. However, if you don't hold the stock long enough
to meet the holding period requirements, when the stock is sold you may have to report
compensation income (wages). The split will affect the computation of capital gain
and compensation income, if any.
For the stock purchased under an employee stock purchase plan to receive favorable
tax treatment, it must be held for at least two years after the stock is granted and
at least one year after the stock is transferred to you. If the holding periods are
not met, the lesser of the fair market value of the stock on the grant date minus
the option price or the fair market value on the sale date minus the amount you paid
for the stock is compensation income (wages). To the extent that the gain is being
taxed as wages on your return, it becomes part of your adjusted basis in the stock
sold. When determining basis, the amount you paid for the stock is divided equally
among the shares received in the split.
For information on incentive stock option plans and nonstatutory stock options,
or more information on employee stock purchase plans, refer to Publication 525, Taxable
and Nontaxable Income
References:
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