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When you purchase stock under an employee stock purchase plan (ESPP), the income isn’t taxable at the time of purchase. You’ll recognize the income and pay tax on it when you sell the stock.
When you sell the stock, the income can be either ordinary or capital gain. The sale will qualify for capital gain treatment as long as the stock is held for both of these time periods:
Also, the individual must remain a company employee until at least 3 months before exercising the option.
When you sell the stock, and meet the above requirements, you recognize 2 types of taxable income:
The ordinary income might be more than the gain on the sale. The stock’s basis is the total of both:
Report the amount of ordinary gain as wages on Form 1040, line 7.
Losses on the sale of ESPP stock are capital losses.