Question
I purchased stock from my employer under a § 423 employee stock purchase plan and received a Form 1099-B for selling it. How do I report this?
Answer

Under a § 423 employee stock purchase 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 purchase price) and the amount you receive when you sell it. You generally treat this amount as capital gain or loss, but 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 received a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. You must report all 1099-B transactions on Schedule D (Form 1040), Capital Gains and Losses and you may need to use Form 8949, Sales and Other Dispositions of Capital Assets. This is true even if there's no net capital gain subject to tax.

You must first determine if you meet the holding period. You meet the holding period requirement if you don't 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 you meet the holding period requirement:

  • You can generally treat the sale of stock 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 (FMV) at the time the option was granted.

If you don't meet the holding period requirement:

  • The ordinary income that you should report in the year of the sale is the amount by which the FMV of the stock at the time of purchase (or vesting, if later) exceeds the purchase price. Treat any additional gain or loss as capital gain or loss.

If you meet the holding period requirement and the option price was below (but not less than 85% of) the FMV of the stock at the time the option was granted:

  • You report as ordinary income (wages) on line 1 of Form 1040, U.S. Individual Income Tax Return the lesser of (1) the amount by which the stock's FMV on the date of grant exceeds the option price or (2) the amount by which the stock's FMV on the date of sale or other disposition exceeds the purchase price. Your employer should report the ordinary income to you as wages in box 1 of Form W-2, Wage and Tax Statement. If your employer (or former employer) doesn't provide you with a Form W-2, or if the Form W-2 doesn't include the income in box 1, you must still report the income as wages on Form 1040 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, if required, on Form 8949.

If you don't satisfy the holding period requirement and sell the stock for less than the purchase price, your loss is a capital loss but you still may have ordinary income.

You should receive a Form 3922, 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 in tracking your holding period and figuring your cost basis for the stock purchased through your qualifying plan.