We can then subtract the taxes due from the gross sale proceeds to obtain our after-tax proceeds. A qualifying disposition occurs when you sell your shares at least 1 year from the purchase date and at least 2 years from the ESPP offering date. If you earn $120,000 per year and your company allows you to invest up to 15% of your pre-tax income then you can invest up to $18,000 annually or $9,000 in each six-month purchase period. Payroll deductions to purchase stock in the ESPP would begin with your first paycheck after the commencement of the first purchase period on December 15, 2014. On June 14, 2015 (the last day of the first six-month purchase period) you would buy shares of your company stock at $76.50, which is 85% of the lower of the two prices ($90) in the first six-month purchase period. At $76.50, you could buy a maximum of 117.65 shares ($9,000/$76.50). The offering period is broken down into six-month purchase periods in order to maximize the value of the benefit.
Shares are purchased on June 15 and December 15. The amount you pay for the shares is the lower of two prices—the offering date price or the purchase date price—plus an additional 15% discount.
Disposition Phase
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The purchase date, which is when the company buys its own shares at a discounted rate on behalf of employees, marks the end of the offer period. You pay ordinary income tax on the lesser of the discount offered based on the offering date price or the gain between the actual purchase price and the final sale price. That may expose you to concentration and single stock risk. When you enroll, contribute, and/or purchase shares in an employee stock purchase plan, you don’t owe additional income tax from these actions. Only when you sell your shares will you encounter a reportable tax event. You usually use a few documents to do that reporting, including Form 3922 and Form 1099-B. This is where it gets a little complicated.
An ESPP is a program in which employees can purchase company stock at a discounted price. An employee stock option is a grant to an employee giving the right to buy a certain number of shares in the company’s stock for a set price. ESPPs allow workers to buy shares of their employers’ stock in a simple and convenient manner by using after-tax payroll deductions. They are perhaps the simplest form of stock purchase plan in use today. Most plans allow you to sell ESPP shares anytime once you own them. It is possible that your company may restrict or require approval on the sale of certain securities. Check with your human resources or compliance department to be sure.
For stock plans, your cost basis may need to be adjusted to reflect the compensation income you already reported and paid tax on. But don’t worry—Fidelity will calculate your cost basis and provide it on the tax forms you receive. Shares of stock received or purchased through a stock plan are considered income and generally subject to ordinary income taxes.1 Additionally, when shares are sold, you’ll need to report the capital gain or loss. Learn more about taxes, when they’re paid, and how to file your tax return.
An ESPP with an embedded discount is a great employee benefit. If you can afford it, you should participate up to the full amount and then sell the stock as soon as you can after the purchase date. We would even prioritize participating in your ESPP over your 401 plan because it is likely to generate a much higher after-tax return. You already have a generous return and there’s no reason to take more risk in your company stock by holding it longer than necessary. If you don’t think you will have the discipline to sell your ESPP shares immediately then consider not participating altogether.
We’ll help you understand which documents to gather and how to read—and use—the tax forms you’ll receive from Fidelity. To learn more, watch this on-demand workshop or jump to the appropriate tax-filing guide below for step-by-step instructions to prepare for filing. If you’re not sure which plan you’re in, log in to NetBenefits®Log In Required and look for your stock plan on the home page. Daniel Zajac, CFP® is a CERTIFIED FINANCIAL PLANNER™ Professional who writes about equity compensation and employee stock options in a way that is easy to understand. Capital gains would be reported on the tax return, subject to the appropriate tax rate (0%, 15%, 20% in 2020). If you are thinking about donating shares, and have other share types too , there may besome planning opportunities based on the type of shares you have, the basis, and the holding periods. A good ESPP can provide you with a way to purchase company stock at an attractive price.
Why Its A Great Investment
If you purchase shares and immediately sell them, expect to pay income taxes on the 15% discount, which is considered compensation by your employer. If you hold ESPP shares after purchase and they appreciate in value, you may pay capital gains taxes in addition to income tax on the discount.
Offer period March 1 – 25, 2018 at participating offices only. To qualify, tax return must be paid for and filed during this period. Visit hrblock.com/halfoff to find the nearest participating office or to make an appointment.
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Tax
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Tax, legal, or Social Security claiming advice is not offered through, nor supervised by The Lincoln Investment Companies. Each case is different, and you should do your own due diligence on each ESPP purchase that you have – then use that information to determine what the best strategy for each may be. You need to understand the ESPP tax rules themselves — but it’s just as important that you know how to determine what the after-tax proceeds of your ESPP participation may be. The after-tax amount is the money that you can actually use to do the things you want to do. Southern New Hampshire University is a registered trademark in the United State and/or other countries. H&R Block does not automatically register hour with SNHU. Students will need to contact SNHU to request matriculation of credit.
- Any additional profit is considered long-term capital gain and should be reported on Schedule D, Capital Gains and Losses.
- If the 1099-B shows the true and correct basis as adjusted for the compensation income, then no adjustment is needed.
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- We suggest that you discuss your specific tax issues with a qualified tax advisor.
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Separating Compensation Income From Capital Gains Income
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At Brown Wealth Management, we use sophisticated software to test clients’ financial plans so they know how much employer stock they can afford to own without risking their financial futures. Your company-run Employee Stock Purchase Plan allows you to buy shares of your employer’s stock at a discounted price, typically through after-tax payroll deductions. You report as ordinary income on line 1 of Form 1040, U.S.
Tax Treatment
Wealth Enhancement Group is a registered trademark of Wealth Enhancement Group, LLC. If you’re not satisfied, return it within 60 days of shipment with your dated receipt for a full refund (excluding shipping & handling). Therefore, your total cost basis is $1,500, and the long-term capital gain reported on Schedule D is $3,490 ($4,990 – $1,500). You must also report the sale of your stock on Schedule D, Part II as a long-term sale. It’s long term because there is over one year between the date acquired (6/30/2016) and the date of sale (1/20/2020). In this example, as in the previous one, the sales price you report on Schedule D is $4,990 and the cost basis is $2,500. As in the previous example, your employer should include the bargain element in your wages on your 2020 Form W-2.
The increase or decrease in the value of the shares is counted as capital gains income. While this has a whole host of implications, it’s important to know how to measure compensation income. An employee stock purchase plan is a company-run program in which participating employees can buy company shares at a discounted price. This type of disposition counts a great deal more of the sale proceeds as ordinary income. The seller must count the difference between the closing price of the stock as of the purchase date and the discounted purchase price as ordinary income.
