Employee Stock Purchase Plan Taxes
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:
- At least two years after the option is granted
- At least one year after you buy the stock
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:
- Might be less than the fair market value (FMV) of the stock on the date you received it. If so, you have ordinary income to the extent FMV is more than 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.
- Might not be less than the FMV of the stock on the date you received it. If so, treat the income as long-term capital gain.
Report the capital gain on Schedule D. The stock basis is the option price. The capital gain — for any income more than the ordinary income — is determined above.
- If you don’t meet the holding period requirement, it’s a disqualifying disposition. You can only recognize ordinary income. To figure the ordinary income amount:
- Determine the FMV of the stock on the date you received it (exercise date).
- Subtract the amount paid for the stock (option price).
The ordinary income might be more than the gain on the sale. The stock’s basis is the total of both:
- Ordinary income amount
- Stock’s option price
Report the amount of ordinary gain as wages on Form 1040, Line 7.
Losses on the sale of ESPP stock are capital losses.
Learn more about nontaxable distributions on Form 1099-Div Box 3 and get tax answers at H&R Block.
What is a holding period? Learn more about an investment holding period and get tax answers at H&R Block.
What is the cost basis of stock and other investments? Learn more about calculating the basis and get tax answers from H&R Block.
Learn more about taxing interest on savings bonds and education savings bond rules with the tax experts at H&R Block.