My company offered ESPP. Basically, the way it worked was there were two-year offering periods. If you opted-in, your base price was set on the first day of the period. ESPP buys were every six months. If the price on the buy-date was lower than the base price, you got that price plus an additional 15% discount. If it was higher, you got 15% below the base price.
I didn’t sell too much while I was working. Just hoarded it. The few sales I did, they resulted in W2 income. The company would give me a printout of the sale, which had all the relevant details (e.g. how much W2 income). Come tax time, I would factor that in, and often owed no additional tax because it was already taxed. I can dig up the formula they gave us if that helps.
But I retired three years ago. I sold some ESPP in 2025. It would be a qualifying disposition, but I don’t think I need to file that form with the company now (yes?). Do I treat this as any other long-term sale?
I think I read that I don’t have to account for the 15% discount, so calculate the basis with the market price that day. Correct? Does that also include the additional discount if the price was higher on the purchase day compared to the beginning price of the two-year offering period? It almost always was higher than the base price, so that would be huge if I calculate the basis from the market price on purchase rather than the offering price I actually paid.
No, that’s not correct. You are still required to account for the discount as ordinary income. You will need to “dig up the formula” to determine how much ordinary income you need to declare for the discount.
The basis will be the price you actually paid, plus the discount you received and declared as ordinary income.
I managed to find the “example” they gave out. The cost basis was the total purchase price plus the W2 income, which is -I quote- “included in boxes 1, 16, & 18 on W-2, also listed in box 14 & included w/ “SG”. The example provided showed a hypothetical sale (qualifying distribution), and the net was actually negative (i.e. a net loss) after factoring in the W2 income.
So, I need to factor in the 15% as ordinary income? It’s not going to be a simple “proceeds received minus cost basis cap gain”. If I’m not going to receive a W2 or 1099, how would I document the income? I’m assuming I’m not going to receive either. Or do I have to report to the company, and they’ll issue a W2?
I haven’t sold any ESPP since 2008 (it’s just been RSUs since then). I don’t keep much documentation from that long ago. Typically 10 years. They handed out that example most years as part of the “understanding your W2” packet.
Well, the basis will include the discount, so once you figure out the basis, the long term capital gain will be the simple “proceeds received minus cost basis”. The trick is in figuring out the basis.
As 'other income’ on line 8 of Schedule 1.
No, since it was a qualifying disposition, you probably won’t receive a W-2. If it had been a disqualifying disposition, you should receive a W-2.
If your ESPP is held through Fidelity, you may be in luck. Based on a sample size of 1 ESPP that I am familiar with, the consolidated 1099 that Fidelity sent at the end of the year has supplementary information that shows what you will need to include in your tax return for the ESPP sale. I will note that I don’t know if Fidelity does this for all ESPPs, but I suspect they do. Other ESPP brokers may do this, too, but I don’t know if they do.
If your ESPP broker does not include that information, here are examples on how to calculate the ordinary income and the capital gain provided by an ESPP that has a 10% discount, not a 15% discount. But you should be able to use these examples to calculate how to report your sales by adjusting the discount to 15%. Note that you will need to know the FMV as of the beginning and ending of the ESPP offer period, as well as the price you sold at.
Nope. It was originally with DB Alex Brown. But probably 15 years ago they moved it to E-Trade (the company moved it). I could have transferred all my shares out, but I didn’t. I only use that E-Trade account for my ESPP/RSUs. I have a separate private brokerage (originally Scottrade, but after a few acquisitions, Schwab owns it now) for all my other investments. I don’t know that the entire purchase history was transferred to E-Trade, though I think it should have been(??). Certainly since they took over, they have all the records from that point at least.
HR used to give out printouts showing our histories, and I certainly saved those. I might have to dig into the depths to find them, since I haven’t sold ESPP since 2008, but I never would have tossed those.
I know E-Trade has been providing ESPP services for many years (I had one there probably 20 years ago), so they may also provide tax information similar to Fidelity’s in the 1099 - so be sure to check your 1099, especially any information listed as ‘supplemental’. But if not, you can choose among the scenarios I provided and should be able to figure the discount and your gain to report from that.
My ESPP is through ETrade…. their 1099 has the raw transaction prices only. They do issue a very helpful “supplemental” document that captures the details of the ESPP discount, whatever was reported as regular income, and the adjusted cost basis. You just need to manually adjust everything when filing taxes.
I hope you don’t mind revisiting this. Managed to get the purchase history from HR of the company. Brokerage didn’t have it prior to them taking over the plan. But HR sent me the history, split adjusted.
So, to take one example, the “grant date” is 3/1/99. “Purchase begin date” is 3/1/2000. Purchase date is 8/31/2000. I believe the “grant” date is the start of the offering period(?), which were 2 years each. Purchase date is obvious. “Begin date” I’m not sure about. Making up some round numbers here:
Grant Date FMV $5, Purchase value $10, less ESPP discount gives a purchase price of $4.25 (15% discount on $5). So I have to record “ordinary income” (sales price minus purchase price) of $6.75? It’s not just a cost basis of 4.25, and report the capital gain from that (which, on date of sale, is say $100)? So, not a cap gain of 95.75? It’s ordinary income between FMV on purchase minus actual purchase price (6.75), and then cap gain on purchase value price against the price I sold ($100-$10=$90)?
I’m spreadsheeting the numbers they sent me so I can keep track of which lots I have sold, and what the cap gain is. Plus, apparently, ordinary income.
Years ago, well, 2002, when I retired, I dumped nearly all of my LU shares, sorting out the cost basis was nearly impossible as they were bought once a month, ESPP, plus some matching at various rates, and the purchases varied by that month’s wages, OT, etc.. In the end, “pick a number let ‘em prove it wrong” was the answer… Same with all the bits n pieces of the Bell RBOCs as the split out from T after divestiture… Messy, but over!!
I’ve never been audited, but it is my understanding that with the IRS you’re guilty until you prove yourself innocent. I’m assuming I have to PROVE my numbers, they don’t have to disprove them.
FMV for the begin date (your ‘grant date’ of 3/1/99) was $5 and FMV on 8/31/00 (the date you purchased) was $10, but you were able to purchase at $4.25. You eventually sold for $100.
So, this is example C in the screen shots above: End price ($10) is higher than begin price ($5) and sales price ($100) is higher than end price.
Since the time between when you sold and the purchase date was ~25 years, that’s obviously longer than 21 months, so it’s a qualifying sale.
So if we follow the calculations for the Example C qualifying sale, per share:
Ordinary income you will declare is the FMV on the purchase date minus your purchase price: $10 - $4.25 = $5.75
Basis for the shares is your purchase price plus the ordinary income you are declaring: $4.25 + $5.75 = $10
Long term capital gain is your sale price minus the basis: $100 - $10 = $90
ESPP ordinary income should be reported on line 8k (Stock Options) of schedule 1. If you can’t get your software to cooperate and report it there because it’s not reported on the 1099-B as a stock option, it would be okay to report it on line 8z (other income) of Schedule 1, with a note that it’s ordinary income from a qualifying ESPP sale.
Note: If both the grant date FMV and the price you sold for were both higher than FMV on your purchase date, you would follow example A, not example C. Given how long you’ve held the shares, I doubt you will be selling at prices less than the FMV on your purchase date, but those would be example B and D.
Thanks a lot for your patience. My sale last year…I had to take it from two different lots/purchases. One was example C, and the other was example A. Since I started assigning lots on my original sales long ago, I believe I am exempt from FIFO (at least that’s what they told me when they changed to rules to FIFO). So I chose the lots to minimize ordinary income so as not to unduly jeopardize our ACA credits.
(BTW, I did spot my typo above…I meant to 5.75, not 6.75. Which you corrected anyway.)
I have a lot of cap gain from this sale (almost the entire sum…the shares cost around $2, and I was selling for around $60), but so long as our household income is below about $96K, we shouldn’t pay any cap gains per note 409. Which probably shouldn’t be the law, but apparently it is. So I will take full advantage.
For 2026, the capital gains tax up to $98,900 for MFJ is 0%. I will point out that it’s actually your taxable income, not your AGI, though. So with a standard deduction of $32,200, your household AGI would have to be over $131k before you would have to pay any capital gains tax.
It’s been that way for a long time. You can thank Ronald Regan (1986 Tax Reform Act) and Bill Clinton (Taxpayer Relief Act of 1997).
Us either, so we’re in the clear by now I’m sure, I still have a lot of files, but not the pay stubs for that whole time frame, but the reports likely are still in the file cabinet, once I’d gotten everything into my E Jones account, I was told to just trash that old paper, a file drawer full, but I haven’t, it just rests quietly in the corner along with a ton of other paperwork from over the years.. An old WeCo file cabinet, actually that I stripped of it’s gray paint, refinished..
I do understand. I also have been in the position of whom ever will handle your estate. My prediction is your estate handler(s) will not lack the motivation to empty file cabinets of paper. When my parents house was cleared out, my sister had dumpsters set in the drive and hired moving van workers to empty the house. (There was a great, unexpected cash offer for the house conditional with closing in 15 days.)
Similar experience with my dad’s estate. We had an estate sale. The people we hired went through the house and organized and priced everything. They also had a dumpster where items that had no value were placed. Anything that didn’t sale was donated or thrown away. After the sale they cleaned the house, making it ready for sale. We also had a cash offer for the asking price one day after listing the house.
Dad had a 4-drawer cabinet full of old financial and medical records. It took a few days of burning to get rid of them.
The 0% bracket for long-term capital gains wasn’t introduced in the 1986 tax act. Instead, that tax act simplified the entire tax system to two brackets, a 15% bracket, and a 28% bracket, and eliminated the long-term capital gains preference (reducing the effective rate for some people (from 20% to 15%) and increasing the effective rate for other people (from 20% to 28%)). This one I remember first-hand because it was in the early/mid 80s that I first began to invest/trade.
The very low brackets for long-term capital gains were introduced in the 2003 tax bill. First at 5% in 2006, later down to 0% in 2008.
When I retired, I had a lot of proprietary paperwork, work related I didn’t want to end up out in the public, test methods, etc, plus a lot of paperwork left from my parents estate, my MILs estate, so I called a commercial shredding company, they wanted things in banks boxes to estimate the volume and nothing in binders at all, so I got it together, met the truck in a parking lot, and they took care of it, complete with a video camera so you can watch the materials as they’re shredded.. So not that much volume here, I have had, used, a Royal 16 Microcut shredder here in my cave for years, anything with our name, info gets shredded, as well as any light cardboard boxes, Amazon packaging, whatever… It goes into our Yard Waste bin along with leaves, cuttings, picked up by our trash company… Sometimes it’s half or more of just shreddings… So if I were bored, I could deal with the leftover financial paperwork, easy to delay, tho…
