So…I was just informed that whenever we sell ESPP shares, even after we’ve retired, it will be an event reportable on a W2. If we keep the shares in the company brokerage (ETrade), it will be handled. Otherwise we have to fill out a “qualifying disposition” form and send it to the company.
I believe, if I understand correctly, that it is to our benefit since that affects the cost basis when reporting the sale of ESPP shares.
I believe, if I understand correctly, that it is to our benefit since that affects the cost basis when reporting the sale of ESPP shares.
Even after you’ve retired, if you received a discount on the ESPP shares, you need to report that as ordinary income. If you move it to another brokerage, you need to be sure that you have all of the information to properly report any future sales.
I believe, if I understand correctly, that it is to our benefit since that affects the cost basis when reporting the sale of ESPP shares.
While you understand the procedure correctly, I would argue that it is not to your benefit. Yes, the cost basis is adjusted by the amount of the purchase discount, thereby reducing your capital gain. However the adjustment amount is now taxable at ordinary income rates.
While you understand the procedure correctly, I would argue that it is not to your benefit. Yes, the cost basis is adjusted by the amount of the purchase discount, thereby reducing your capital gain. However the adjustment amount is now taxable at ordinary income rates.
Exactly! To paraphrase “Animal Farm”, “some cost bases are more equal than others”.
Exactly! To paraphrase “Animal Farm”, “some cost bases are more equal than others”.
How so? The discount that was received from the company when purchasing ESPP shares is not part of the cost basis - it’s compensation. Therefore, it’s being taxed at ordinary income rates in the year it’s received, just like compensation is.
Therefore, it’s being taxed at ordinary income rates in the year it’s received, just like compensation is.
That’s what I thought. That’s why my W2 income is a lot more than my stated salary. By doing the disposition, I adjust my cost basis in a way that benefits me. It’s been several years since I sold any ESPP, but as I recall the few times I ever did the cost basis nearly zeroed-out my taxable gain.
That’s what I thought. That’s why my W2 income is a lot more than my stated salary. . . . It’s been several years since I sold any ESPP
Okay, I’m confused. You don’t receive the compensation by realizing the discount on ESPP shares until you actually sell the shares, so you aren’t taxed on the ESPP discount until then. If you haven’t been selling any ESPP shares, it’s not the ESPP discount that’s adding to your W-2.
Maybe the reason that your current W-2 income is higher is because of restricted stock or stock options that you’ve been granted? Those are taxed as they vest - generally on a quarterly or annual basis over a 4 year period, although there are some that may be shorter or longer.
as I recall the few times I ever did the cost basis nearly zeroed-out my taxable gain
If you are doing the calculations for ESPP shares correctly, that should only occur if there’s been little/no gain in the stock.
You don’t receive the compensation by realizing the discount on ESPP shares until you actually sell the shares,…
Pretty sure they have been including it. I could contact HR to verify, but that’s really the only way my W2 income would be as high as it is. I get RSUs, but they’re trivial. A paltry handful hardly worth the effort (my company is cheap). And they withhold shares pre-tax to pay the taxes. So my basis for them starts at the current price on the day of vesting. I don’t think my other benefits would elevate it that much. My W2 incomes is usually about 25% higher than my quoted salary.
I have a document (somewhere) how to calculate the gains on the ESPP. This somehow manipulated my basis so that it reduced my gains by a lot. I don’t know if they include anything else related to ESPP (i.e. would they include the gains in a qualified (or unqualified?) disposition??). I know they are treated differently because the first time I did it I treated them like ordinary stock, and my gain was HUGE. When I was made aware of my error, and used the HR method, it nearly zeroed-out. I had assumed it was already reported as W2 income.
Of course, I haven’t sold any in several years. And none of my old shares. The ones that have a 70x appreciation (give or take).
I’ll have to dig out the paper, or maybe ask HR to give me a new copy.
The W2 event when I sell is because of the discount. I’ll have to dig into my W2 a little more carefully if I want to see what the extra income is for. I know “Box 12” (I think) always has “SG” (which stands for “stock gains”), and there is always a non-zero number there. There are also always at least two other boxes marked there. As you can see, I just enter my W2 into TurboTax, and then stick it in my files. I never really explored it carefully.
I haven’t sold any ESPP in 10 years or more. It’s possible that I specified a lot that had minimal gains, and that’s why it zeroed. The few times I sold, I specified lots. They changed that rule, but apparently I am “grandfathered” in because I did it already.
I have sold RSUs more recently, so know how those work. I use the “withhold shares” option for taxes.
I’ll have to dig into my W2 a little more carefully if I want to see what the extra income is for.
Compensation can include things like the value of non-cash incentives (I’ve had it include the value of gift cards and a FitBit); premiums for employer paid life insurance of more than $50k; car allowances, etc. If it’s of value and you received it from your employer to compensate you for your job, it should be documented on your W-2.
I know “Box 12” (I think) always has “SG” (which stands for “stock gains”), and there is always a non-zero number there.
I think you may be confused. The W-2 https://www.irs.gov/pub/irs-pdf/fw2.pdf has no IRS specified code of “SG”, so if that code appears on your W=2, it’s probably placed by your employer in Box 14 (Other), which is where employers can put additional information, not in Box 12.
You’re right, box 14 has “SG”. Though this year they changed it to “RSU”. Last year was “SG”.
So that’s probably the vesting of RSUs each year. Typically, you aren’t taxed on an RSU grant until it vests. At that time, you are taxed at ordinary income rates on the entire value of the vested stock, minus any price that you paid for the RSU. Upon vesting, taxes will be withheld. You can pay those withholding taxes by either having the administrator sell enough shares to satisfy the withholding (this is what’s typically done), or by having enough cash in your RSU account to pay the withholding taxes. If you eventually sell the vested RSUs, your cost basis will be the value at the time that the shares vested, and the vesting date is the acquisition date to determine whether the gains are long term or short term.
There is a way that you can be taxed on the shares when you get the grant, called 83(b). If you expect the stock to increase significantly, this can minimize the ordinary income taxes you end up paying. But if you bet wrong, and the stock decreases, you will have paid more in ordinary income taxes than you would have if you’d waited for it to vest.
If memory serves, you can’t use the 83b option with RSUs as there are no stock shares involved, only stock valuations. But for Restricted Stock, the 83b election must be taken within 30 days of the grant. The fair value of the stock on grant date, minus any amount paid for the shares (if any) will be reported as W2 income. The holding period begins on the grant date. The advantage is the appreciation from grant to whenever the shares are sold after the vesting date will be treated as a capital gain rather than W2 income when the restricted stock shares vest. But as you point out, if the price declines or if the employee leaves the company prior to vesting, the employee still has to include the original fair value as W2 income and cannot claim a capital loss or refund. For that reason, we did not recommend using the 83b option on established companies. The 83b works best with owners of small start-ups when the stock price is very low relative to what the owners think it will be at a later period.