Question:   I purchased stock from my employer under an employee stock purchase plan. Now I have received a Form 1099-B from selling it. How do I report this?

Answer:   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.

The holding period requirement is satisfied if you do not sell the stock until the end of the later of:

• The 1-year period after the stock was transferred to you, or
• 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, 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 exceeds the option price.
• If your gain is more than the amount you report as ordinary income, the remainder is a capital gain reported on Form 1040, Schedule D (PDF).

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.