Stocks (Options, Splits, Traders)
Question: I purchased stock from my employer under a § 423 employee stock purchase plan. Now I have received a Form 1099-B from selling it. How do I report this?
Under a § 423 employee stock option plan, you have taxable income or a deductible loss when you sell the stock. Your income or loss is the difference between the amount you paid for the stock (the option price) and the amount you receive when you sell it. You generally treat this amount as capital gains or losses; however, you may also have ordinary income to report.
You must account for and report this sale on your tax return. You have indicated that you have a Form 1099-B (PDF); you must report all 1099-B transactions on Schedule D (Form 1040) (PDF), Capital Gains and Losses, and Form 8949 (PDF), Sales and Other Dispositions of Capital Assets. This is true even if there is no net capital gain to be taxed.
You must first determine if you meet the holding period. The holding period requirement is satisfied if you do not sell the stock until the end of the:
- The 1-year period after the stock was transferred to you, AND
- The 2-year period after the option was granted.
If the holding period requirement is satisfied:
- The sale of stock is treated generally as giving rise to capital gain or loss. You may have ordinary income if the option price was below the stock's fair market value at the time the option was granted; or
If the holding period requirement is not satisfied:
- The ordinary income that you should report in the year of the sale is the amount by which the fair market value of the stock at the time of purchase (or vesting, if later) exceeds the exercise price. Any additional gain or loss is treated as capital gain or loss.
If the holding period requirement is satisfied but the option exercise price is below the fair market value of the stock at the time the option was granted:
- On Form 1040 (PDF), Line 7, you report as ordinary income (wages) the lesser of (1) the amount by which the stock’s fair market value on the date of grant exceeds the option price or (2) the amount by which the stock’s fair market value on the date of sale or other disposition exceeds the option price. Your employer should report the ordinary income to you as wages in box 1 of Form W-2 (PDF). If your employer (or former employer) does not provide you with a Form W-2, or if the Form W-2 does not include the income in box 1, you must still report the income as wages on Form 1040, line 7, for the year of sale or other disposition.
- If your gain is more than the amount you report as ordinary income, the remainder is a capital gain reported on Schedule D (Form 1040) and Form 8949.
If you do not satisfy the holding period requirement and sell the stock for less than the amount you paid for it, your loss is a capital loss, but you still may have ordinary income.
You should receive a Form 3922 (PDF), Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c), from your employer when the employer has recorded the first transfer of legal title of stock you acquired pursuant to your exercise of the option . This form will assist you with the tracking of your holding period and your cost basis for the stock purchased through your qualifying plan.
Category: Capital Gains, Losses and Sale of Home
Subcategory: Stocks (Options, Splits, Traders)