When you buy stock under an employee stock purchase plan (ESPP), the income isn’t taxable at the time you buy it. 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:
Also, you must stay employed by the company until at least three months before you exercise the option.
If you meet the holding-period requirements, your ordinary income from the sale depends on the option price. The option price:
Report this income as wages on Form 1040, line 7. The stock’s basis includes the ordinary income recognized in the sale year.
Report the capital gain on Schedule D. The stock basis is the option price. Capital gain -- for any income more than the ordinary income -- is determined above.
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.